UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
10-Q10-Q/A
 
☒
 
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT
 
OF 1934
 
For the quarterly period ended
September 30, 2021
 
or
☐
 
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 
ACT OF 1934
For the transition period from ______ to
 
______
Commission file number
001-39028
 
CROSSFIRST BANKSHARES, INC.
 
(Exact Name of Registrant as Specified in its Charter)
Kansas
26-3212879
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
11440 Tomahawk Creek Parkway
Leawood
,
KS
66211
(Address of principal executive offices)
(Zip Code)
(
913
)
312-6822
 
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CFB
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
 
Yes
 
☒
 
No
 
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required
to be submitted pursuant
to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant
was required to submit such files).
 
Yes
 
☒
 
No
 
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange
Act.
 
☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
 
☐
 
No
 
☒
As of November 1, 2021, the registrant had
50,918,788
 
shares of common stock, par value $0.01, outstanding.
 
2
CrossFirst Bankshares, Inc.
Form 10-Q for the Quarter Ended September 30, 2021
Index
Part I. Financial Information
Item 1. Financial Statements
Forward-Looking Information
4
5
6
7
9
Notes to Consolidated Financial Statements (unaudited)
10
13
14
18
30
30
31
31
32
34
34
38
38
38
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
39
41
41
45
47
48
49
49
49
50
53
55
57
57
57
58
59
60
Part II. Other Information
60
60
61
62
63
3
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” and “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 Annual Report on Form 10-K for the fiscal
year ended December 31, 2020, filed with the Securities and
Exchange Commission (“SEC”) on February 26, 2021, any subsequent quarterly report on Form 10-Q as well as in our other filings with
the 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.
See Notes to Consolidated Financial Statements (unaudited)
4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2021
December 31, 2020
(Unaudited)
(Dollars in thousands)
Assets
Cash and cash equivalents
$
316,722
$
408,810
Available-for-sale securities - taxable
168,182
177,238
Available-for-sale securities - tax-exempt
539,924
477,350
Loans, net of allowance for loan losses of $
64,152
and $
75,295
at September 30,
2021 and December 31, 2020, respectively
4,168,965
4,366,602
Premises and equipment, net
66,598
70,509
Restricted equity securities
12,885
15,543
Interest receivable
15,928
17,236
Foreclosed assets held for sale
1,148
2,347
Bank-owned life insurance
67,104
67,498
Other
43,695
56,170
Total assets
$
5,401,151
$
5,659,303
Liabilities and stockholders’
equity
Deposits
Noninterest-bearing
$
960,999
$
718,459
Savings, NOW and money market
2,774,477
2,932,799
Time
701,121
1,043,482
Total deposits
4,436,597
4,694,740
Federal funds purchased and repurchase agreements
0
2,306
Federal Home Loan Bank advances
276,600
293,100
Other borrowings
997
963
Interest payable and other liabilities
34,550
43,766
Total liabilities
4,748,744
5,034,875
Stockholders’ equity
Common stock, $
0.01
par value:
authorized -
200,000,000
shares, issued -
52,576,504
and
52,289,129
shares at
September 30, 2021 and December 31, 2020, respectively
526
523
Treasury stock, at cost:
1,573,806
and
609,613
shares held at September 30, 2021 and December 31, 2020,
respectively
(20,000)
(6,061)
Additional paid-in capital
525,676
522,911
Retained earnings
126,299
77,652
Accumulated other comprehensive income
19,906
29,403
Total stockholders’ equity
652,407
624,428
Total liabilities and stockholders’
equity
$
5,401,151
$
5,659,303
See Notes to Consolidated Financial Statements (unaudited)
5
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(Dollars in thousands except per share data)
Interest Income
Loans, including fees
$
42,664
$
43,929
$
130,268
$
138,591
Available-for-sale securities - taxable
803
1,042
2,423
4,174
Available-for-sale securities - tax-exempt
3,562
3,186
10,410
9,758
Deposits with financial institutions
121
47
359
583
Dividends on bank stocks
161
248
488
808
Total interest income
47,311
48,452
143,948
153,914
Interest Expense
Deposits
4,211
7,298
14,789
29,975
Fed funds purchased and repurchase agreements
0
54
3
162
Federal Home Loan Bank Advances
1,275
1,749
3,838
4,980
Other borrowings
24
24
72
85
Total interest expense
5,510
9,125
18,702
35,202
Net Interest Income
41,801
39,327
125,246
118,712
Provision for Loan Losses
(10,000)
10,875
1,000
45,825
Net Interest Income after Provision for Loan Losses
51,801
28,452
124,246
72,887
Non-Interest Income (Loss)
Service charges and fees on customer accounts
1,196
792
3,330
1,947
Realized gains on available-for-sale securities
1,046
1,012
1,043
1,725
Unrealized gains (losses), net on equity securities
(6,210)
0
(6,243)
53
Income from bank-owned life insurance
427
464
3,088
1,373
Swap fees and credit valuation adjustments, net
31
121
156
80
ATM and credit card interchange income
1,735
1,482
5,569
2,863
Other non-interest income
670
192
1,921
751
Total non-interest income (loss)
(1,105)
4,063
8,864
8,792
Non-Interest Expense
Salaries and employee benefits
15,399
14,628
44,612
43,022
Occupancy
2,416
2,144
7,307
6,274
Professional fees
618
1,132
2,538
3,098
Deposit insurance premiums
927
1,096
2,995
3,151
Data processing
700
652
2,136
2,065
Advertising
596
147
1,334
870
Software and communication
999
959
3,098
2,772
Foreclosed assets, net
(35)
20
680
1,174
Goodwill impairment
0
0
0
7,397
Other non-interest expense
2,416
2,233
7,967
6,421
Total non-interest expense
24,036
23,011
72,667
76,244
Net Income Before Taxes
26,660
9,504
60,443
5,435
Income tax expense
5,660
1,498
11,831
928
Net Income
$
21,000
$
8,006
$
48,612
$
4,507
Basic Earnings Per Share
$
0.41
$
0.15
$
0.95
$
0.09
Diluted Earnings Per Share
$
0.41
$
0.15
$
0.93
$
0.09
See Notes to Consolidated Financial Statements (unaudited)
6
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(Dollars in thousands)
Net Income
$
21,000
$
8,006
$
48,612
$
4,507
Other Comprehensive Income (Loss)
Unrealized gain (loss) on available-for-sale securities
(7,989)
1,923
(11,532)
14,073
Less: income tax expense (benefit)
(1,956)
472
(2,823)
3,440
Unrealized gain (loss) on available-for-sale securities, net of
income tax
(6,033)
1,451
(8,709)
10,633
Reclassification adjustment for realized gains included in income
1,046
1,012
1,043
1,725
Less: income tax expense
256
248
255
422
Less: reclassification adjustment for realized gains included in
income, net of income tax
790
764
788
1,303
Other comprehensive income (loss)
(6,823)
687
(9,497)
9,330
Comprehensive Income
$
14,177
$
8,693
$
39,115
$
13,837
See Notes to Consolidated Financial Statements (unaudited)
7
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Treasury Stock
Total
Shares
Amount
(Dollars in thousands)
Balance at June 30, 2020
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
-
-
1,207
-
-
-
1,207
Balance at September 30, 2020
52,195,778
$
521
$
522,226
$
69,355
$
25,781
$
-
$
617,883
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Treasury Stock
Total
Shares
Amount
(Dollars in thousands)
Balance at June 30, 2021
50,958,680
$
525
$
524,637
$
105,299
$
26,729
$
(20,000)
$
637,190
Net income
-
-
-
21,000
-
-
21,000
Change in unrealized depreciation of available-
for-sale securities
-
-
-
-
(6,823)
-
(6,823)
Issuance of shares from equity-based awards
44,018
1
(110)
-
-
-
(109)
Stock-based compensation
-
-
1,149
-
-
-
1,149
Balance September 30, 2021
51,002,698
$
526
$
525,676
$
126,299
$
19,906
$
(20,000)
$
652,407
 
See Notes to Consolidated Financial Statements (unaudited)
8
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Treasury Stock
Total
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2019
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
-
-
3,223
-
-
-
3,223
Balance at September 30, 2020
52,195,778
$
521
$
522,226
$
69,355
$
25,781
$
-
$
617,883
Common Stock
Additional
Paid-in Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Treasury Stock
Total
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2020
51,679,516
$
523
$
522,911
$
77,652
$
29,403
$
(6,061)
$
624,428
Net income
-
-
-
48,612
-
-
48,612
Change in unrealized depreciation of available-
for-sale securities
-
-
-
-
(9,497)
-
(9,497)
Issuance of shares from equity-based awards
287,375
3
(608)
-
-
-
(605)
Open market common share repurchases
(964,193)
-
-
-
-
(13,939)
(13,939)
Employee receivables from sale of stock
-
-
-
35
-
-
35
Stock-based compensation
-
-
3,373
-
-
-
3,373
Balance September 30, 2021
51,002,698
$
526
$
525,676
$
126,299
$
19,906
$
(20,000)
$
652,407
See Notes to Consolidated Financial Statements (unaudited)
9
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine Months Ended
September 30,
2021
2020
(Dollars in thousands)
Operating Activities
Net income
$
48,612
$
4,507
Items not requiring (providing) cash
Depreciation and amortization
3,993
3,888
Provision for loan losses
1,000
45,825
Accretion of discounts and amortization of premiums on securities
3,876
4,632
Equity based compensation
3,373
3,223
Foreclosed asset impairment
630
1,270
Deferred income taxes
2,233
(5,098)
Net increase in bank owned life insurance
(3,088)
(1,373)
Net recognized gains (losses) on equity securities
6,243
(53)
Net realized gains on available-for-sale securities
(1,043)
(1,725)
Goodwill impairment
0
7,397
Changes in
Interest receivable
1,308
(3,287)
Other assets
(1,753)
(1,472)
Other liabilities
(541)
(4,546)
Net cash provided by operating activities
64,843
53,188
Investing Activities
Net change in loans
196,637
(652,251)
Purchases of available-for-sale securities
(168,705)
(35,326)
Proceeds from maturities of available-for-sale securities
83,546
102,529
Proceeds from sale of available-for-sale securities
15,923
31,810
Proceeds from the sale of foreclosed assets
628
-
Purchase of premises and equipment
(671)
(4,849)
Proceeds from the sale of premises and equipment and related insurance claims
547
121
Purchase of restricted equity securities
0
(2,839)
Proceeds from sale of restricted equity securities
3,143
0
Proceeds from death benefit on bank owned life insurance
3,483
0
Net cash provided by (used in) investing activities
134,531
(560,805)
Financing Activities
Net increase in demand deposits, savings, NOW and money market accounts
84,218
667,849
Net decrease in time deposits
(342,361)
(99,060)
Net decrease in fed funds purchased and repurchase agreements
(2,306)
(1,390)
Proceeds from Federal Home Loan Bank advances
0
138,000
Repayment of Federal Home Loan Bank advances
(16,500)
(160,643)
Issuance of common shares, net of issuance cost
3
0
Proceeds from employee stock purchase plan
172
0
Repurchase of common stock
(13,939)
0
Acquisition of common stock for tax withholding obligations
(784)
(869)
Net decrease in employee receivables
35
46
Net cash provided by (used in) financing activities
(291,462)
543,933
Increase (Decrease) in Cash and Cash Equivalents
(92,088)
36,316
Cash and Cash Equivalents, Beginning of Period
408,810
187,320
Cash and Cash Equivalents, End of Period
$
316,722
$
223,636
Supplemental Cash Flows Information
Interest paid
$
19,402
$
37,238
Income taxes paid
$
8,370
$
7,335
Notes to Consolidated Financial Statements (unaudited)
10
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of OperationsEXPLANATORY NOTE
CrossFirst Bankshares, Inc. (the “Company”) is a bank holding company whose principal activitiesfiling this Amendment No. 1 (the Amendment”) on Form 10-Q/A to amend its Quarterly
Report on Form 10-Q for the quarter ended September 30, 2021, filed with the Securities and Exchange Commission on November 2,
2021 (the “Original 10-Q”), for the purpose of filing revised versions of Exhibits 31.1 and 31.2 filed with the Original 10-Q.
We are the ownership and
management of its wholly-owned subsidiary, CrossFirst Bank (the “Bank”). In addition, the Bank has
3
subsidiaries including
CrossFirst Investments, Inc. (“CFI”) that holds investmentsfiling revised exhibits solely in marketable securities, CFBSA
I, LLC that holds foreclosed assets and
CFBSA II, LLC that holds foreclosed assets.
The Bank is primarily engaged in providing a full range of banking and financial servicesorder to individual and corporate customers
through its branches in: (i) Leawood, Kansas; (ii) Wichita, Kansas; (iii) Kansas City, Missouri; (iv) Oklahoma City, Oklahoma; (v)
Tulsa, Oklahoma; (vi) Dallas, Texas; (vii) Frisco, Texas; and (viii) Phoenix,
Arizona.
Basis of Presentation
The Company’s accounting and reporting policies conform to accounting principles generally acceptedinclude in the United Statescertifications set forth in the Exhibits the language added to the introductory
(“GAAP”).portion of paragraph 4 and the language of revised paragraph 4(b), which language was inadvertently omitted from the certifications when
originally filed. The consolidated financial statements includeAmendment does not reflect events occurring after the accountsdate of the Company,filing of the Bank, CFI, CFBSA
I, LLC and CFBSA II,Original 10-Q or modify or update any
LLC. All significant intercompany accounts and transactions
have been eliminatedof the other disclosures contained therein 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 andany way. Accordingly, the Amendment should be read in conjunction with the Company’s
consolidated financialOriginal 10-Q.
statements and footnotes included inThe Amendment consists solely of the Company’s
Annual Report on Form 10-Kpreceding cover page, this explanatory note, the exhibit index for the year ended December 31, 2020 (the “2020Amendment, the signature
Form 10-K”), filed with the Securitiespage and Exchange Commission (the “SEC”) on February 26, 2021.
In the opinionparagraphs 1, 2, 4 and 5 of management, the interim financial statements include all adjustments which are of a normal, recurring nature
necessary for the fair presentationeach 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.
No significant changes in the accounting policies of the Company occurred since December 31, 2020, the most recent date
financial statements were provided within the Company’s 2020 Form 10-K. 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 identified accounting policies and estimates that, duerevised certifications filed as exhibits 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
losses, deferred tax asset, and fair value of financial instruments are particularly susceptible to significant change.
Cash Equivalents
The Company had $
253
million of cash and cash equivalents at the Federal Reserve Bank of Kansas City as of September 30,
2021. The reserve required at September 30, 2021 was $
0
.
Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”)
The CARES Act gave financial institutions the right to elect
to suspend GAAP principles and regulatory determinations for loan
modifications relating to COVID-19 that would otherwise be categorized as troubled debt restructurings (“TDRs”) from March 1, 2020,
through December 31, 2020. On December 27, 2020, the Consolidated Appropriations
Act, 2021 was signed into law, which extended
the period during which the Company may suspend GAAP principles and regulatory determinations for loan modifications relating
to
Amendment.
 
 
Notes to Consolidated Financial Statements (unaudited)
11
COVID-19 that would otherwise be categorized as TDRs through January 1, 2022.
The Company elected to apply the guidance starting
in the first quarter of 2020.
Changes Affecting Comparability
Beginning with the quarter ended March 31, 2021, the Company consolidated the “Goodwill and other intangible assets,
net” into
“other assets” within the Consolidated Balance Sheets. The consolidation was due to the immateriality of the remaining intangible
assets. The change had no impact on net income.
For the quarter ended September 30, 2021, the Company broke out “unrealized gains (losses), net on equity securities”
that was
previously consolidated in “other non-interest income”.
As a result, changes within the Consolidated Statements of Income in the prior
periods were made to conform to the current period presentation. The changes provided additional detail
about the Company’s
operations. The changes had no impact on net income.
Emerging Growth Company (“EGC”)
The Company is currently an 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.
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 opts out of the extended transition period under the JOBS
Act.
Notes to Consolidated Financial Statements (unaudited)
12
Recent Accounting Pronouncements
The following table provides information about Accounting Standard Updates (“ASUs”) the Company
anticipates to adopt in the
future:
Standard
Anticipated
Date of
Adoption
Description
Effect on Financial Statements or Other Significant Matters
ASU 2016-13
Financial
Instruments-
Credit Losses
If the Company
maintains its
EGC status, the
Company is not
required to
implement this
standard until
January 2023.
The Company
expects to
implement this
standard on
January 1, 2022.
Requires an entity to
utilize a new
impairment model
known as the current
expected credit loss
("CECL") model to
estimate its lifetime
expected credit loss
and record an
allowance that, when
deducted from
amortized cost basis
of the financial asset,
presents the net
amount expected to
be collected on the
financial asset.
The Company established a committee to formulate and oversee the
implementation process including selection, implementation and testing of
third-party software.
The Company began parallel processing with the existing allowance for loan
losses model during the first quarter of 2019 recalibrating inputs as
necessary. The Company is formulating changes to policies, procedures,
disclosures and internal controls that will be necessary to transition to the
new standard. A
third-party completed validation of the completeness,
accuracy and reasonableness of the model in the fourth quarter of 2021.
The Company plans to use a loss-rate ("cohort") method to estimate the
expected allowance for credit losses ("ACL") for all loan pools. Upon
adoption in 2022, a cumulative-effect adjustment for the change in the
ACL
will be recognized in retained earnings. Based on our forecasted economic
conditions and portfolio balances at September 30, 2021, the adoption of the
standard could result in an overall cumulative-effect adjustment of up to a
5% change in the ACL, as compared to our current reserve levels.
These
results include the adoption of a forecast based on several economic
assumptions, including unemployment rates and management judgments.
Adoption will not materially impact reporting for debt securities as the
Company does not currently own held-to-maturity debt securities within the
scope of ASU 2016-13.
The actual impact could be significantly affected by the composition,
characteristics, and quality of the underlying loan portfolio and economic
assumptions at the time of adoption.
The Company does not expect the adoption to have a significant impact on
capital or capital ratios and will continue to evaluate the impact the adoption
of ASU 2016-13 will have on the Company's consolidated financial
statements.
Notes to Consolidated Financial Statements (unaudited)
13
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 on
January 1, 2022.
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 expects to apply the update as of the beginning of
the period of adoption and the Company does not plan 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.
The Company’s current operating leases relate primarily to four
branch locations. Based on 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's lease portfolio as of the adoption date.
Note 2: Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(Dollars in thousands except per share data)
Earnings per Share
Net income available to common stockholders
$
21,000
$
8,006
$
48,612
$
4,507
Weighted average common shares
50,990,113
52,136,286
51,368,957
52,104,372
Earnings per share
$
0.41
$
0.15
$
0.95
$
0.09
Diluted Earnings per Share
Net income available to common stockholders
$
21,000
$
8,006
$
48,612
$
4,507
Weighted average common shares
50,990,113
52,136,286
51,368,957
52,104,372
Effect of dilutive shares
615,608
423,840
699,257
463,219
Weighted average dilutive common shares
51,605,721
52,560,126
52,068,214
52,567,591
Diluted earnings per share
$
0.41
$
0.15
$
0.93
$
0.09
Stock-based awards not included because to do so would be
antidilutive
587,200
1,214,433
657,887
1,053,393
Notes to Consolidated Financial Statements (unaudited)
14
Note 3: Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of period end available-for-sale
securities consisted of the following:
September 30, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
132,059
$
2,326
$
1,421
$
132,964
Collateralized mortgage obligations - GSE residential
22,122
498
16
22,604
State and political subdivisions
523,324
27,922
2,968
548,278
Corporate bonds
4,242
85
67
4,260
Total available-for-sale securities
$
681,747
$
30,831
$
4,472
$
708,106
December 31, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
104,839
$
4,277
$
0
$
109,116
Collateralized mortgage obligations - GSE residential
52,070
984
42
53,012
State and political subdivisions
454,486
33,642
31
488,097
Corporate bonds
4,259
104
0
4,363
Total available-for-sale securities
$
615,654
$
39,007
$
73
$
654,588
Notes to Consolidated Financial Statements (unaudited)
15
The amortized cost and fair value of available-for-sale securities at September 30, 2021, by contractual maturity, are shown
below:
September 30, 2021
Within
After One to
After Five to
After
One Year
Five Years
Ten Years
Ten Years
Total
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
(1)
Amortized cost
$
-
$
40
$
148
$
131,871
$
132,059
Estimated fair value
$
-
$
41
$
159
$
132,764
$
132,964
Weighted average yield
(2)
0.00
%
4.68
%
3.96
%
1.60
%
1.60
%
Collateralized mortgage obligations -
GSE residential
(1)
Amortized cost
$
-
$
-
$
2,438
$
19,684
$
22,122
Estimated fair value
$
-
$
-
$
2,608
$
19,996
$
22,604
Weighted average yield
(2)
0.00
%
0.00
%
2.77
%
1.16
%
1.34
%
State and political subdivisions
Amortized cost
$
522
$
6,115
$
78,231
$
438,456
$
523,324
Estimated fair value
$
524
$
6,319
$
84,402
$
457,033
$
548,278
Weighted average yield
(2)
3.25
%
3.88
%
3.35
%
2.76
%
2.86
%
Corporate bonds
Amortized cost
$
-
$
355
$
3,887
$
-
$
4,242
Estimated fair value
$
-
$
360
$
3,900
$
-
$
4,260
Weighted average yield
(2)
0.00
%
4.22
%
4.54
%
0.00
%
4.52
%
Total available-for-sale securities
Amortized cost
$
522
$
6,510
$
84,704
$
590,011
$
681,747
Estimated fair value
$
524
$
6,720
$
91,069
$
609,793
$
708,106
Weighted average yield
(2)
3.25
%
3.90
%
3.39
%
2.44
%
2.58
%
(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.
Notes to Consolidated Financial Statements (unaudited)
16
The following tables show the number of securities, unrealized loss, 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, 2021 and December 31, 2020:
September 30, 2021
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
securities
Mortgage-backed -
GSE residential
$
70,590
$
1,421
15
$
0
$
0
0
$
70,590
$
1,421
15
Collateralized
mortgage obligations
- GSE residential
1,561
15
3
161
1
1
1,722
16
4
State and political
subdivisions
99,890
2,964
62
1,101
4
3
100,991
2,968
65
Corporate bonds
3,433
67
1
0
0
0
3,433
67
1
Total temporarily
impaired securities
$
175,474
$
4,467
81
$
1,262
$
5
4
$
176,736
$
4,472
85
December 31, 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
securities
Mortgage-backed -
GSE residential
$
0
$
0
0
$
0
$
0
0
$
0
$
0
0
Collateralized
mortgage obligations
- GSE residential
9,933
42
5
0
0
0
9,933
42
5
State and political
subdivisions
8,525
31
8
25
0
1
8,550
31
9
Corporate bonds
0
0
0
0
0
0
0
0
0
Total temporarily
impaired securities
$
18,458
$
73
13
$
25
$
0
1
$
18,483
$
73
14
The Company expects to recover the amortized cost basis over the term of 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.
The following tables show the gross gains and losses on securities that matured or were sold:
For the Three Months Ended
For the Nine Months Ended
September 30, 2021
September 30, 2021
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Gain
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Gain
(Dollars in thousands)
Available-for-sale securities
$
1,125
$
79
$
1,046
$
1,151
$
108
$
1,043
Notes to Consolidated Financial Statements (unaudited)
17
For the Three Months Ended
For the Nine Months Ended
September 30, 2020
September 30, 2020
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Gain
Gross
Realized
Gains
(1)
Gross
Realized
Losses
Net
Realized
Gain
(Dollars in thousands)
Available-for-sale securities
$
1,025
$
13
$
1,012
$
1,785
$
60
$
1,725
(1)
The gross gains for the nine-months ended September 30, 2020, included $
75
thousand related to a previously disclosed OTTI
municipal security that was settled in 2020.
Equity Securities
Equity securities consist of a $
2
million investment in a Community Reinvestment
Act (“CRA”) mutual fund, a $
308
thousand
private equity investment and a $
5
million privately-held security acquired in the fourth quarter of 2020 as part of a debt restructuring.
Equity securities are included in “other assets” on the Consolidated Balance Sheets.
The privately-held security was acquired in partial satisfaction of debts previously contracted at an initial value of $
11
million.
The Company elected a measurement alternative that allows the security to remain at cost until an impairment is identified
or an
observable price change for an identical or similar investment of the same issuer occurs. Impairment is recorded when there is evidence
that the expected fair value of the investment has declined to below the recorded cost. During the third quarter of 2021, qualitative
impairment factors required the Company to update the equity’s fair market value and the Company recorded a $
6
million unrealized
loss on the equity security due to a reduction in its fair market value.
The following is a summary of the unrealized and realized gains and losses recognized in net income on equity securities:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(Dollars in thousands)
Net gains (losses) recognized during the reporting period on equity securities
$
(6,210)
$
0
$
(6,243)
$
53
Less: net gains recognized during the reporting period on equity securities sold
during the reporting period
0
0
0
0
Unrealized gain (losses) recognized during the reporting period on equity
securities still held at the reporting date
$
(6,210)
$
0
$
(6,243)
$
53
Notes to Consolidated Financial Statements (unaudited)
18
Note 4:
Loans and Allowance for Loan Losses (“ALLL”)
Categories of loans at September 30, 2021 and December 31, 2020 include:
September 30, 2021
December 31, 2020
(Dollars in thousands)
Commercial
$
1,305,536
$
1,338,757
Energy
296,365
345,233
Commercial real estate
1,266,694
1,179,534
Construction and land development
585,134
563,144
Residential and multifamily real estate
620,877
680,932
Paycheck Protection Program (“PPP”)
109,465
292,230
Consumer
62,113
55,270
Gross loans
4,246,184
4,455,100
Less: Allowance for loan losses
64,152
75,295
Less: Net deferred loan fees and costs
13,067
13,203
Net loans
$
4,168,965
$
4,366,602
Allowance for Loan Losses
The 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 ALLL is evaluated
on a regular basis by management and is based upon management’s periodic review of its ability to collect the loans considering 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 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 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. No changes to loan definitions,
segmentation, and ALLL
methodology occurred during the third quarter of 2021.
The following tables summarize the activity in the 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:
Notes to Consolidated Financial Statements (unaudited)
19
Commercial
Energy
Commercial
Real Estate
Construction and
Land
Development
Residential and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Three Months Ended September 30, 2021
Allowance for loan losses
Beginning balance
$
28,433
$
17,849
$
19,181
$
3,885
$
5,826
$
0
$
319
$
75,493
Provision
(3,666)
(4,798)
(236)
(694)
(561)
0
(45)
(10,000)
Charge-offs
(1,071)
(503)
0
0
0
0
(1)
(1,575)
Recoveries
225
0
0
0
5
0
4
234
Ending balance
$
23,921
$
12,548
$
18,945
$
3,191
$
5,270
$
0
$
277
$
64,152
Commercial
Energy
Commercial
Real Estate
Construction and
Land
Development
Residential and
Multifamily
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
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 and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Nine Months Ended September 30, 2021
Allowance for loan losses
Beginning balance
$
24,693
$
18,341
$
22,354
$
3,612
$
5,842
$
0
$
453
$
75,295
Provision
10,881
(5,290)
(3,409)
(421)
(577)
0
(184)
1,000
Charge-offs
(11,903)
(503)
0
0
0
0
(1)
(12,407)
Recoveries
250
0
0
0
5
0
9
264
Ending balance
$
23,921
$
12,548
$
18,945
$
3,191
$
5,270
$
0
$
277
$
64,152
Notes to Consolidated Financial Statements (unaudited)
20
Commercial
Energy
Commercial
Real Estate
Construction and
Land
Development
Residential and
Multifamily
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
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 and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
September 30, 2021
Period end allowance for loan losses allocated to:
Individually evaluated for impairment
$
1,760
$
2,624
$
2,872
$
0
$
0
$
0
$
0
$
7,256
Collectively evaluated for impairment
$
22,161
$
9,924
$
16,073
$
3,191
$
5,270
$
0
$
277
$
56,896
Ending balance
$
23,921
$
12,548
$
18,945
$
3,191
$
5,270
$
0
$
277
$
64,152
Allocated to loans:
Individually evaluated for impairment
$
24,455
$
25,503
$
35,319
$
0
$
8,942
$
0
$
236
$
94,455
Collectively evaluated for impairment
$
1,281,081
$
270,862
$
1,231,375
$
585,134
$
611,935
$
109,465
$
61,877
$
4,151,729
Ending balance
$
1,305,536
$
296,365
$
1,266,694
$
585,134
$
620,877
$
109,465
$
62,113
$
4,246,184
Notes to Consolidated Financial Statements (unaudited)
21
Commercial
Energy
Commercial
Real Estate
Construction and
Land
Development
Residential and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
December 31, 2020
Period end allowance for loan losses allocated to:
Individually evaluated for impairment
$
1,115
$
3,370
$
5,048
$
0
$
0
$
0
$
0
$
9,533
Collectively evaluated for impairment
$
23,578
$
14,971
$
17,306
$
3,612
$
5,842
$
0
$
453
$
65,762
Ending balance
$
24,693
$
18,341
$
22,354
$
3,612
$
5,842
$
0
$
453
$
75,295
Allocated to loans:
Individually evaluated for impairment
$
44,678
$
26,045
$
44,318
$
0
$
6,329
$
0
$
244
$
121,614
Collectively evaluated for impairment
$
1,294,079
$
319,188
$
1,135,216
$
563,144
$
674,603
$
292,230
$
55,026
$
4,333,486
Ending balance
$
1,338,757
$
345,233
$
1,179,534
$
563,144
$
680,932
$
292,230
$
55,270
$
4,455,100
Credit Risk Profile
The Company analyzes its loan portfolio based on internal rating categories (grades 1 - 8), portfolio segmentation and payment activity. These
categories are utilized to
develop the associated ALLL.
A description of the loan grades and segments follows:
Loan Grades
●
Pass (risk rating 1-4)
- The category includes loans that are considered satisfactory. The category 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)
- The category includes borrowers that 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)
- The category includes borrowers that 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)
- The category includes borrowers that exhibit weaknesses inherent in a substandard credit and
characteristics 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.
Notes to Consolidated Financial Statements (unaudited)
22
Loan Portfolio Segments
●
Commercial
- The category 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
- The category 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
- The category includes loans that 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
- The category includes loans that 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 and Multifamily Real Estate
- The category includes loans that 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 category includes loans that were established by the CARES
Act which authorized forgivable loans to small businesses to pay their employees during the
COVID-19 pandemic. The loans are 100 percent guaranteed by the SBA
and repayment is primarily dependent on the borrower’s cash flow or SBA
repayment
approval.
●
Consumer
- The category includes 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 the borrower’s market area) and the creditworthiness of a borrower.
Notes to Consolidated Financial Statements (unaudited)
23
The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating categories (grades 1 - 8), portfolio segmentation, and payment
activity:
Pass
Special
Mention
Substandard
Performing
Substandard
Nonperforming
Doubtful
Loss
Total
(Dollars in thousands)
September 30, 2021
Commercial
$
1,230,682
$
47,492
$
20,907
$
6,455
$
0
$
0
$
1,305,536
Energy
133,551
116,495
20,887
22,348
3,084
0
296,365
Commercial real estate
1,119,569
109,639
27,221
10,265
0
0
1,266,694
Construction and land development
585,134
0
0
0
0
0
585,134
Residential and multifamily real estate
607,588
546
6,984
5,759
0
0
620,877
PPP
109,465
0
0
0
0
0
109,465
Consumer
61,826
51
0
236
0
0
62,113
$
3,847,815
$
274,223
$
75,999
$
45,063
$
3,084
$
0
$
4,246,184
Pass
Special
Mention
Substandard
Performing
Substandard
Nonperforming
Doubtful
Loss
Total
(Dollars in thousands)
December 31, 2020
Commercial
$
1,182,519
$
66,142
$
63,407
$
26,124
$
565
$
0
$
1,338,757
Energy
145,598
90,134
83,574
22,177
3,750
0
345,233
Commercial real estate
1,035,056
67,710
57,680
19,088
0
0
1,179,534
Construction and land development
561,871
125
1,148
0
0
0
563,144
Residential and multifamily real estate
672,327
305
5,199
3,101
0
0
680,932
PPP
292,230
0
0
0
0
0
292,230
Consumer
55,026
0
0
244
0
0
55,270
$
3,944,627
$
224,416
$
211,008
$
70,734
$
4,315
$
0
$
4,455,100
Notes to Consolidated Financial Statements (unaudited)
24
Loan Portfolio Aging Analysis
The following tables present the Company’s loan portfolio aging analysis as of September 30, 2021 and December 31, 2020:
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, 2021
Commercial
$
1,716
$
12,700
$
1,167
$
15,583
$
1,289,953
$
1,305,536
$
300
Energy
738
6,500
6,144
13,382
282,983
296,365
0
Commercial real estate
398
15,328
0
15,726
1,250,968
1,266,694
0
Construction and land development
0
0
0
0
585,134
585,134
0
Residential and multifamily real estate
191
0
1,844
2,035
618,842
620,877
42
PPP
0
0
0
0
109,465
109,465
0
Consumer
29
0
0
29
62,084
62,113
0
$
3,072
$
34,528
$
9,155
$
46,755
$
4,199,429
$
4,246,184
$
342
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, 2020
Commercial
$
8,497
$
264
$
11,236
$
19,997
$
1,318,760
$
1,338,757
$
0
Energy
0
0
7,173
7,173
338,060
345,233
372
Commercial real estate
63
7,677
4,825
12,565
1,166,969
1,179,534
0
Construction and land development
0
0
0
0
563,144
563,144
0
Residential and multifamily real estate
1,577
0
3,520
5,097
675,835
680,932
652
PPP
0
0
0
0
292,230
292,230
0
Consumer
0
0
0
0
55,270
55,270
0
$
10,137
$
7,941
$
26,754
$
44,832
$
4,410,268
$
4,455,100
$
1,024
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.
Notes to Consolidated Financial Statements (unaudited)
25
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. The following tables
present loans individually evaluated for impairment, including all restructured and
formerly restructured loans, for the periods ended September 30, 2021 and December 31, 2020:
Recorded Balance
Unpaid Principal Balance
Specific Allowance
(Dollars in thousands)
September 30, 2021
Loans without a specific valuation
Commercial
$
22,570
$
22,651
$
-
Energy
809
1,809
-
Commercial real estate
9,398
10,982
-
Construction and land development
0
0
-
Residential and multifamily real estate
8,942
9,198
-
PPP
0
0
-
Consumer
236
236
-
Loans with a specific valuation
Commercial
1,885
14,069
1,760
Energy
24,694
32,289
2,624
Commercial real estate
25,921
25,921
2,872
Construction and land development
0
0
0
Residential and multifamily real estate
0
0
0
PPP
0
0
0
Consumer
0
0
0
Total
Commercial
24,455
36,720
1,760
Energy
25,503
34,098
2,624
Commercial real estate
35,319
36,903
2,872
Construction and land development
0
0
0
Residential and multifamily real estate
8,942
9,198
0
PPP
0
0
0
Consumer
236
236
0
$
94,455
$
117,155
$
7,256
Notes to Consolidated Financial Statements (unaudited)
26
Recorded Balance
Unpaid Principal Balance
Specific Allowance
(Dollars in thousands)
December 31, 2020
Loans without a specific valuation
Commercial
$
36,111
$
50,245
$
-
Energy
3,864
6,677
-
Commercial real estate
10,079
11,663
-
Construction and land development
0
0
-
Residential and multifamily real estate
6,329
6,585
-
PPP
0
0
-
Consumer
244
244
-
Loans with a specific valuation
Commercial
8,567
8,567
1,115
Energy
22,181
27,460
3,370
Commercial real estate
34,239
34,239
5,048
Construction and land development
0
0
0
Residential and multifamily real estate
0
0
-
PPP
0
0
0
Consumer
0
0
0
Total
Commercial
44,678
58,812
1,115
Energy
26,045
34,137
3,370
Commercial real estate
44,318
45,902
5,048
Construction and land development
0
0
0
Residential and multifamily real estate
6,329
6,585
0
PPP
0
0
0
Consumer
244
244
0
$
121,614
$
145,680
$
9,533
Notes to Consolidated Financial Statements (unaudited)
27
The table below shows interest income recognized during the three- and nine-month periods ended September 30, 2021 and 2020 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,
2021
2020
2021
2020
(Dollars in thousands)
Commercial
$
307
$
12
$
930
$
841
Energy
1
2
18
257
Commercial real estate
291
58
868
346
Construction and land development
0
0
0
0
Residential and multifamily real estate
16
36
78
108
PPP
0
0
0
0
Consumer
0
0
0
0
Total interest income recognized
$
615
$
108
$
1,894
$
1,552
The table below shows the three- and nine-month average balance of impaired loans for the periods ended September
30, 2021 and 2020 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,
2021
2020
2021
2020
(Dollars in thousands)
Commercial
$
26,724
$
45,482
$
28,675
$
49,538
Energy
26,298
21,396
26,863
23,220
Commercial real estate
35,488
17,937
35,856
18,132
Construction and land development
0
0
0
0
Residential and multifamily real estate
6,021
6,419
5,505
6,304
PPP
0
0
0
0
Consumer
238
248
240
253
Total average impaired loans
$
94,769
$
91,482
$
97,139
$
97,447
Non-accrual Loans
Non-accrual loans are loans for which the Company does not record interest income. The accrual of
interest on loans is discontinued at the time the loan is 90 days past due
unless the credit is well secured and in process of collection. Past due status is based on contractual terms
of the loan. In all cases, loans are placed on non-accrual or charged off at
an earlier date, if collection of principal or interest is considered doubtful.
Notes to Consolidated Financial Statements (unaudited)
28
All interest accrued but not collected for loans that are placed on non-accrual or charged off are reversed against interest income.
The interest on these loans is accounted for
on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are
brought current and future payments are reasonably assured. The following table presents the Company’s non-accrual
loans by loan category at September 30, 2021 and
December 31, 2020:
September 30, 2021
December 31, 2020
(Dollars in thousands)
Commercial
$
6,455
$
26,691
Energy
25,432
25,927
Commercial real estate
10,265
19,088
Construction and land development
0
0
Residential and multifamily real estate
5,759
3,101
PPP
0
0
Consumer
236
244
Total non-accrual loans
$
48,147
$
75,051
Troubled Debt Restructurings
Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession, excluding
loan modifications as a result
of the COVID-19 pandemic. The modification of terms typically includes the extension of maturity, reduction or deferment of monthly
payment, or reduction of the stated interest
rate.
For the three- and nine-month periods ended September 30, 2021 and 2020, the modifications related to the TDRs below did not impact
the ALLL because
the loans were
previously impaired and evaluated on an individual basis or enough collateral was obtained.
Notes to Consolidated Financial Statements (unaudited)
29
The table below presents loans restructured, excluding loans restructured as a result of the COVID-19 pandemic, during the three- and nine-month
periods ended
September 30, 2021 and 2020, including the post-modification outstanding balance and the type of concession made:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(Dollars in thousands)
Commercial
- Interest rate reduction
$
1,000
$
-
$
1,000
$
3,171
Energy
- Extension of maturity date
-
-
-
2,340
Residential and multifamily real estate
- Interest rate reduction
3,750
-
3,750
-
- Payment deferral
-
-
-
65
Total troubled debt restructurings
$
4,750
$
0
$
4,750
$
5,576
The balance of restructured loans, excluding loans restructured as a result of the COVID-19 pandemic, is provided below as of September
30, 2021 and December 31, 2020.
In addition, the balance of those loans that are in default at any time during the past twelve months at September 30, 2021 and December
31, 2020 is provided below:
September 30, 2021
December 31, 2020
Number of
Loans
Outstanding
Balance
Balance 90 days past due at any
time during previous 12
months
(1)
Number of
Loans
Outstanding
Balance
Balance 90 days past due at any
time during previous 12
months
(1)
(Dollars in thousands)
Commercial
4
$
19,395
$
4,899
7
$
22,759
$
2,776
Energy
4
10,401
7,825
4
11,053
2,713
Commercial real estate
4
25,762
0
4
26,038
0
Construction and land development
0
0
0
0
0
0
Residential and multifamily real estate
2
6,933
89
2
3,245
0
PPP
0
0
0
0
0
0
Consumer
0
0
0
0
0
0
Total troubled debt restructured loans
14
$
62,491
$
12,813
17
$
63,095
$
5,489
(1)
Default is considered to mean 90 days or more past due as to interest or principal.
The TDRs above had an allowance of $
4
million as of both September 30, 2021 and December 31, 2020.
Notes to Consolidated Financial Statements (unaudited)
30
Note 5:
Derivatives and Hedging
Derivatives not designated as hedges are not speculative and result from a service the Company provides to clients.
The
Company executes interest rate swaps with customers to facilitate their respective risk management strategies. Those interest
rate swaps
are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company
minimizes its
net risk exposure resulting from such transactions.
As the interest rate derivatives associated with this program do not meet the strict
hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized
directly in earnings.
As of September 30, 2021 and December 31, 2020, the Company had the following outstanding derivatives that were not
designated as hedges in qualifying hedging relationships:
September 30, 2021
December 31, 2020
Product
Number of Instruments
Notional Amount
Number of Instruments
Notional Amount
(Dollars in thousands)
Back-to-back swaps
56
$
573,304
56
$
515,567
The table below presents the fair value of the Company’s derivative financial instruments and their classification on the Balance
Sheet as of September 30, 2021 and December 31, 2020:
Asset Derivatives
Liability Derivatives
Balance Sheet
September 30,
December 31,
Balance Sheet
September 30,
December 31,
Location
2021
2020
Location
2021
2020
(Dollars in thousands)
Derivatives not designated as hedging instruments
Interest rate products
Other assets
$
15,424
$
24,094
Other liabilities
$
15,628
$
24,454
The effect of the Company’s derivative financial instruments that are not designated as hedging instruments are reported on the
Consolidated Statements of Income as swap fee income, net, which includes swap fees earned upon origination and credit
valuation
adjustments that represent the risk of a counterparty’s default. The effect of the Company’s derivative financial
instruments gain (loss)
are reported on the Consolidated Statements of Cash Flows within “other assets” and “other liabilities”.
Note 6:
Time Deposits and Borrowings
The scheduled maturities, excluding interest, of the Company’s borrowings at September 30, 2021 were as follows:
September 30, 2021
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)
Time deposits
$
586,365
$
83,090
$
27,086
$
187
$
4,393
$
0
$
701,121
FHLB borrowings
21,500
35,000
0
5,100
0
215,000
276,600
Trust preferred securities
(1)
0
0
0
0
0
997
997
$
607,865
$
118,090
$
27,086
$
5,287
$
4,393
$
215,997
$
978,718
(1)
The contract value of the trust preferred securities is $
2.6
million and is currently being accreted to the maturity date of 2035.
Notes to Consolidated Financial Statements (unaudited)
31
Note 7:
Change in Accumulated Other Comprehensive Income (“AOCI”)
Amounts reclassified from AOCI and the affected line items in the Consolidated
Statements of Income during the three- and nine-
month periods ended September 30, 2021 and 2020, were as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Affected Line Item in the
2021
2020
2021
2020
Statements of Income
(Dollars in thousands)
Unrealized gains on available-for-sale
securities
$
1,046
$
1,012
$
1,043
$
1,725
Gain on sale of available-for-sale
securities
Less: tax benefit effect
256
248
255
422
Income tax benefit
Net reclassified amount
$
790
$
764
$
788
$
1,303
Note 8:
Regulatory Matters
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, 2021, the Company and the Bank met all capital adequacy requirements to which they are subject.
The capital rules require the Company to maintain a 2.5% capital conservation buffer with respect to Common Equity
Tier I
capital, Tier I capital to risk-weighted assets, and total capital to risk-weighted assets, which is included
in the column “Minimum
Capital Required - Basel III” within the table below. A
financial institution with a conservation buffer of less than the required amount is
subject to limitations on capital distributions, including dividend payments and stock repurchases, as well as certain discretionary
bonus
payments to executive officers.
Notes to Consolidated Financial Statements (unaudited)
32
The Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2021 and December 31, 2020 are presented
in the following table:
Actual
Minimum Capital
Required - Basel III
Required to be Considered
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
September 30, 2021
Total Capital to Risk-Weighted Assets
Consolidated
$
694,816
13.9
%
$
525,431
10.5
%
N/A
N/A
Bank
663,787
13.3
525,157
10.5
$
500,150
10.0
%
Tier I Capital to Risk-Weighted Assets
Consolidated
632,244
12.6
425,349
8.5
N/A
N/A
Bank
601,248
12.0
425,127
8.5
400,120
8.0
Common Equity Tier 1 to Risk-Weighted
Assets
Consolidated
631,247
12.6
350,287
7.0
N/A
N/A
Bank
601,248
12.0
350,105
7.0
325,097
6.5
Tier I Capital to Average
Assets
Consolidated
632,244
11.8
214,865
4.0
N/A
N/A
Bank
$
601,248
11.2
%
$
214,943
4.0
%
$
268,679
5.0
%
December 31, 2020
Total Capital to Risk-Weighted Assets
Consolidated
$
656,806
13.1
%
$
527,486
10.5
%
N/A
N/A
Bank
611,533
12.2
527,217
10.5
$
502,111
10.0
%
Tier I Capital to Risk-Weighted Assets
Consolidated
593,865
11.8
427,012
8.5
N/A
N/A
Bank
548,615
10.9
426,794
8.5
401,689
8.0
Common Equity Tier 1 to Risk-Weighted
Assets
Consolidated
592,902
11.8
351,657
7.0
N/A
N/A
Bank
548,615
10.9
351,478
7.0
326,372
6.5
Tier I Capital to Average
Assets
Consolidated
593,865
10.8
219,550
4.0
N/A
N/A
Bank
$
548,615
10.0
%
$
219,441
4.0
%
$
274,302
5.0
%
Note 9:
Stock-Based Compensation
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights under the
2018 Omnibus Equity Incentive Plan (“Omnibus Plan”). The Omnibus Plan will expire on the tenth anniversary
of its effective date. In
addition, the Company has an Employee Stock Purchase Plan that was reinstated during the third quarter of 2020. The aggregate
number
of shares authorized for future issuance under the Omnibus Plan is
1,774,321
shares as of September 30, 2021.
The table below summarizes the stock-based compensation for the three- and nine-month periods ended September 30, 2021 and
2020:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(Dollars in thousands)
Stock appreciation rights
$
150
$
250
$
584
$
744
Performance-based stock awards
75
79
337
175
Restricted stock units and awards
895
857
2,394
2,283
Employee stock purchase plan
29
21
58
21
Total stock-based compensation
$
1,149
$
1,207
$
3,373
$
3,223
Notes to Consolidated Financial Statements (unaudited)
33
Performance-Based Stock Awards (“PBSAs”)
The Company awards PBSAs to key officers of the Company. The performance-based shares typically cliff-vest at the end of
three years
based on attainment of certain performance metrics developed by the Compensation Committee. The
ultimate number of
shares issuable under each performance award is the product of the award target and the award payout percentage given the level of
achievement. The award payout percentages by level of achievement range between
0
% of target and
150
% of target.
During the nine-month period ended September 30, 2021, the Company granted
63,631
PBSAs. The performance metrics include
three year
cumulative, adjusted earnings per share and relative total shareholder return.
The following table summarizes the status of and changes in the performance-based awards:
Performance-Based Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2021
231,631
$
10.51
Granted
63,631
12.89
Incremental performance shares
2,424
10.00
Vested
(77,426)
11.31
Forfeited
0
0
Unvested, September 30, 2021
220,260
$
10.90
Unrecognized stock-based compensation related to the performance awards issued through September 30, 2021 was $
678
thousand and is expected to be recognized over
2.4
years.
Restricted Stock Units (“RSUs”) and Restricted Stock Awards (“RSAs”)
The Company issues RSUs and RSAs to provide incentives to key officers, employees, and nonemployee directors.
Awards are
typically granted annually as determined by the Compensation Committee. The service-based RSUs typically
vest in equal amounts over
three years. The service-based RSAs typically cliff-vest after
one year
.
The following table summarizes the status of and changes in the RSUs and RSAs:
Restricted Stock Units and Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2021
369,217
$
12.61
Granted
281,197
13.27
Vested
(247,690)
11.91
Forfeited
(22,646)
13.65
Unvested, September 30, 2021
380,078
$
13.50
Unrecognized stock-based compensation related to the RSUs and RSAs issued through September 30, 2021 was $
4
million and is
expected to be recognized over
1.9
years.
Notes to Consolidated Financial Statements (unaudited)
34
Note 10:
Income Tax
An income tax expense reconciliation at the statutory rate to the Company’s actual income tax expense is shown below:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(Dollars in thousands)
Computed at the statutory rate (21%)
$
5,598
$
1,996
$
12,693
$
1,141
Increase (decrease) resulting from
Tax-exempt income
(828)
(766)
(2,830)
(2,335)
Nondeductible expenses
55
21
145
119
State income taxes
912
320
2,090
501
Equity based compensation
(40)
(15)
(157)
24
Goodwill impairment
0
0
0
1,553
Other adjustments
(37)
(58)
(110)
(75)
Actual tax expense
$
5,660
$
1,498
$
11,831
$
928
The tax effects of temporary differences related to deferred taxes shown on the Consolidated Balance Sheets are presented below:
September 30, 2021
December 31, 2020
(Dollars in thousands)
Deferred tax assets
Allowance for loan losses
$
15,441
$
18,124
Lease incentive
522
564
Unrecognized loss on equity investment
1,483
0
Loan fees
3,145
3,178
Accrued expenses
2,022
2,128
Deferred compensation
2,244
2,474
State tax credit
1,536
2,621
Other
614
946
Total deferred tax asset
27,007
30,035
Deferred tax liability
Net unrealized gain on securities available-for-sale
(6,453)
(9,531)
FHLB stock basis
(969)
(1,209)
Premises and equipment
(2,739)
(2,881)
Other
(1,187)
(1,601)
Total deferred tax liability
(11,348)
(15,222)
Net deferred tax asset
$
15,659
$
14,813
Note 11:
Disclosures about Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the
use
of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
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.
Notes to Consolidated Financial Statements (unaudited)
35
Recurring Measurements
The following list presents the assets and liabilities recognized in the accompanying Consolidated Balance Sheets measured at
fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30,
2021 and December 31, 2020:
Fair Value Description
Valuation
Hierarchy
Level
Where Fair
Value Balance
Can Be Found
Available-for-
Sale Securities
Where quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. If quoted market prices
are not available, then fair values are estimated by using quoted prices of
securities with similar characteristics or independent asset pricing services
and pricing models, the inputs of which are market-based or independently
sourced market parameters, including, but not limited to, yield curves,
interest rates, volatilities, prepayments, defaults, cumulative loss projections
and cash flows.
Level 2
Note 3:
Securities
Derivatives
Fair value of the interest rate swaps is obtained from independent pricing
services based on quoted market prices for similar derivative contracts.
Level 2
Note 5:
Derivatives and
Hedging
Nonrecurring Measurements
The following tables present assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in
which the fair value measurements fall at September 30, 2021 and December 31, 2020:
September 30, 2021
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)
Collateral-dependent impaired loans
$
45,244
$
0
$
0
$
45,244
Equity security
$
4,989
$
0
$
0
$
4,989
Foreclosed assets held-for-sale
$
1,148
$
0
$
0
$
1,148
December 31, 2020
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)
Collateral-dependent impaired loans
$
55,454
$
0
$
0
$
55,454
Foreclosed assets held-for-sale
$
2,347
$
0
$
0
$
2,347
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring
basis and recognized in the accompanying Consolidated Balance Sheets.
Collateral-dependent Impaired Loans, Net of ALLL
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less
estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
Notes to Consolidated Financial Statements (unaudited)
36
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other
factors and events in the environment that may affect the fair value.
Appraisals of the collateral underlying collateral-dependent loans
are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Office of the Chief
Credit Officer.
Appraisals are reviewed for accuracy and consistency by the Office of the Chief Credit Officer.
Appraisers are selected from the
list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack
of marketability
and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and
estimates
are developed by the Office of the Chief Credit Officer by comparison to historical results.
Equity securities
The Company’s equity investments without readily determinable fair values are held at cost and are adjusted for observable
transactions during the reporting period or if the security is determined to be impaired. The estimated fair value of the equity security
was determined based on the marketability of the investment. The equity investment is classified as Level 3 due to the
infrequency of
the observable prices.
Foreclosed Assets Held-for-Sale
The fair value of foreclosed assets-held-for-sale is based on the appraised fair value of the collateral, less estimated cost to sell.
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value
measurements at September 30, 2021 and December 31, 2020:
September 30, 2021
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
7
%
-
100
%
Collateral-dependent impaired loans
45,244
(
30
)%
Market comparable
transactions
Marketability
discount
Equity security
4,989
(
55
)%
$
Market comparable
properties
Marketability
discount
Foreclosed assets held-for-sale
1,148
(
10
)%
December 31, 2020
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
1
%
-
98
%
Collateral-dependent impaired loans
55,454
(
24
)%
$
Market comparable
properties
Marketability
discount
7
%
-
10
%
Foreclosed assets held-for-sale
2,347
(
9
)%
Notes to Consolidated Financial Statements (unaudited)
37
The following tables present the estimated fair values of the Company’s financial instruments at September 30, 2021 and
December 31, 2020:
September 30, 2021
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
316,722
$
316,722
$
0
$
0
$
316,722
Available-for-sale securities
708,106
0
708,106
0
708,106
Loans, net of allowance for loan losses
4,168,965
0
0
4,154,406
4,154,406
Restricted equity securities
12,885
0
0
12,885
12,885
Interest receivable
15,928
0
15,928
0
15,928
Equity securities
7,521
0
2,224
5,297
7,521
Derivative assets
15,424
0
15,424
0
15,424
$
5,245,551
$
316,722
$
741,682
$
4,172,588
$
5,230,992
Financial Liabilities
Deposits
$
4,436,597
$
960,999
$
0
$
3,504,449
$
4,465,448
Federal Home Loan Bank advances
276,600
0
285,876
0
285,876
Other borrowings
997
0
2,326
0
2,326
Interest payable
1,463
0
1,463
0
1,463
Derivative liabilities
15,628
0
15,628
0
15,628
$
4,731,285
$
960,999
$
305,293
$
3,504,449
$
4,770,741
December 31, 2020
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
408,810
$
408,810
$
0
$
0
$
408,810
Available-for-sale securities
654,588
0
654,588
0
654,588
Loans, net of allowance for loan losses
4,366,602
0
0
4,351,970
4,351,970
Restricted equity securities
15,543
0
0
15,543
15,543
Interest receivable
17,236
0
17,236
0
17,236
Equity securities
13,436
0
2,247
11,189
13,436
Derivative assets
24,094
0
24,094
0
24,094
$
5,500,309
$
408,810
$
698,165
$
4,378,702
$
5,485,677
Financial Liabilities
Deposits
$
4,694,740
$
718,459
$
0
$
4,015,792
$
4,734,251
Federal funds purchased and repurchase agreements
2,306
0
2,306
0
2,306
Federal Home Loan Bank advances
293,100
0
309,020
0
309,020
Other borrowings
963
0
2,024
0
2,024
Interest payable
2,163
0
2,163
0
2,163
Derivative liabilities
24,454
0
24,454
0
24,454
$
5,017,726
$
718,459
$
339,967
$
4,015,792
$
5,074,218
Notes to Consolidated Financial Statements (unaudited)
38
Note 12:
Commitments and Credit Risk
Commitments
The Company had the following commitments at September 30, 2021 and December 31, 2020:
September 30, 2021
December 31, 2020
(Dollars in thousands)
Commitments to originate loans
$
238,863
$
99,596
Standby letters of credit
50,669
48,607
Lines of credit
1,423,363
1,423,038
Total
$
1,712,895
$
1,571,241
Note 13:
Legal and Regulatory Proceedings
General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion
of
management the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the
consolidated financial position, results of operations and cash flows of the Company.
Note 14:
Subsequent Events
On October 18, 2021, the Company announced that its Board of Directors adopted a new stock repurchase program. Under the
repurchase program, the Company may repurchase Company common stock with up to $
30
million in value.
39
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 Company’s
Annual Report on Form 10-K
for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021 (the
“2020 Form 10-K”). Results of operations for the three- and nine-month periods ended September 30, 2021 are not necessarily
indicative of results to be attained for any other period. Certain statements in this report contain forward-looking statements regarding
our 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 because of several factors, including but not limited to those discussed in Item 1A
– "Risk Factors" in the 2020 Form
10-K.
Unless we state otherwise or the context otherwise requires, references in the below section to “we,” “our,” “us,” “ourselves,”
“our company,” and the “Company” refer to CrossFirst Bankshares, Inc., and its consolidated subsidiaries. References
to “CrossFirst
Bank” and the “Bank” refer to CrossFirst Bank, our wholly owned consolidated bank subsidiary.
Third Quarter 2021 Highlights
During the third quarter ended September 30, 2021, we accomplished the following:
●
$5.4 billion of assets at period end with 162% net income growth compared to the third quarter of 2020;
●
Return on Average
Assets of 1.54% and a Return on Equity of 12.92%;
●
Efficiency ratio of 59.06% for the third quarter of 2021, impacted by a $6.2 million unrealized loss on an equity security;
●
Net Interest Margin (Fully Tax-Equivalent) of 3.20% compared to 3.12% in the previous quarter;
●
Noninterest-bearing deposit growth of 27% from September 30, 2020 and accounted for 22% of total deposits at September
30, 2021; and
●
Book value per share of $12.79 at September 30, 2021 compared to $11.84 at September 30, 2020.
Update on the COVID-19 Global Pandemic (“COVID-19”) Impact
The COVID-19 pandemic has caused, and may 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 because of the COVID-19 pandemic. In
April
2021, substantially all employees returned to on-premises work and the Company is evaluating hybrid working opportunities. In
addition, the Bank’s lobbies were re-opened to the public. 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 Coronavirus
Aid, Relief, and Economic Security Act (“CARES
Act”) in March 2020 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.
40
The Consolidated Appropriations
Act of 2021 allocated additional PPP funding. The second
round of PPP loans have similar
terms to the first round of PPP loans mentioned above, but typically mature in five years.
The PPP loans were available through May 5,
2021.
The following table summarizes the impact of the PPP loans on our financials:
As of or for the Three Months Ended
As of or for the Nine Months Ended
September 30,
September 30,
2021
2020
2021
2020
(Dollars in thousands)
PPP Loan
Activity
Outstanding loan balance, beginning
$
197,084
$
369,022
$
292,230
$
-
Loan increases
-
238
133,778
369,260
Loan payoffs
(87,619)
-
(316,543)
-
Outstanding loan balance, end
$
109,465
$
369,260
$
109,465
$
369,260
PPP Loan Fee
Activity
Unearned fee balance, beginning
$
4,708
$
7,885
$
4,189
$
-
Unearned fees added
-
16
5,062
9,946
Earned fees recognized
(1,709)
(1,127)
(6,252)
(3,172)
Unearned fee balance, end
$
2,999
$
6,774
$
2,999
$
6,774
Loan Portfolio and Credit Quality
Credit quality metrics generally improved during the third quarter of 2021 as classified assets decreased $47 million and the ratio
of nonperforming assets to total assets decreased to 0.92% from 1.09% in the previous quarter.
The improvement in credit metrics were
primarily driven by upgrades in COVID-19 impacted segments and the energy portfolio.
The COVID-19 pandemic impacted and may continue to impact our borrowers, which may result in additional charge-offs.
However, the Company’s key credit metrics have generally improved during 2021 and are expected to continue to improve should
the
overall economy continue its current trajectory.
41
Performance Measures
As of or For the Quarter Ended
As of or for the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2021
2021
2021
2020
2020
2021
2020
(Dollars in thousands, except per share data)
Return on average assets
(1)
1.54
%
1.10
%
0.84
%
0.58
%
0.58
%
1.16
%
0.11
%
Return on average equity
(1)
12.92
%
9.86
%
7.80
%
5.19
%
5.19
%
10.24
%
0.98
%
Earnings per share
$
0.41
$
0.30
$
0.23
$
0.16
$
0.15
$
0.95
$
0.09
Diluted earnings per share
$
0.41
$
0.30
$
0.23
$
0.15
$
0.15
$
0.93
$
0.09
Efficiency
(2)
59.06
%
53.61
%
50.41
%
53.35
%
53.03
%
54.18
%
59.44
%
Ratio of equity to assets
12.08
%
12.00
%
10.48
%
11.03
%
11.22
%
12.08
%
11.22
%
(1)
Interim periods annualized
(2)
We calculate efficiency ratio as noninterest expense divided by the sum of net interest income and noninterest
income.
Results of Operations
Net Interest Income
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.
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2021
2021
2021
2020
2020
2021
2020
Yield on securities - tax-equivalent
(1)
2.87
%
2.93
%
2.89
%
2.96
%
2.93
%
2.90
%
3.08
%
Yield on loans
4.00
3.99
3.94
4.00
3.90
3.98
4.36
Yield on earning assets - tax-equivalent
(1)
3.62
3.57
3.50
3.71
3.66
3.56
4.05
Cost of interest-bearing deposits
0.47
0.50
0.57
0.69
0.80
0.51
1.14
Cost of total deposits
0.38
0.41
0.48
0.58
0.67
0.42
0.96
Cost of FHLB and short-term borrowings
1.82
1.79
1.79
1.78
1.50
1.80
1.51
Cost of funds
0.46
0.49
0.56
0.65
0.75
0.50
1.01
Net interest margin - tax-equivalent
(1)
3.20
%
3.12
%
3.00
%
3.12
%
2.98
%
3.10
%
3.13
%
(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%.
42
The following tables present, for the periods indicated, average balance sheet information, interest income, interest expense and the corresponding
average yield and rates
paid:
For the Quarter Ended
September 30, 2021
September 30, 2020
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
$
194,929
$
964
1.96
%
$
257,637
$
1,290
1.99
%
Securities - tax-exempt
(1)
534,917
4,310
3.20
440,669
3,855
3.48
Interest-bearing deposits in other banks
313,188
121
0.15
166,423
47
0.11
Gross loans, net of unearned income
(2)(3)
4,230,553
42,664
4.00
4,477,211
43,929
3.90
Total interest-earning assets
(1)
5,273,587
$
48,059
3.62
%
5,341,940
$
49,121
3.66
%
Allowance for loan losses
(75,103)
(75,970)
Other non-interest-earning assets
210,500
220,282
Total assets
$
5,408,984
$
5,486,252
Interest-bearing liabilities
Transaction deposits
$
510,823
$
259
0.20
%
$
460,420
$
260
0.22
%
Savings and money market deposits
2,276,436
1,907
0.33
1,995,307
2,301
0.46
Time deposits
752,012
2,045
1.08
1,174,555
4,737
1.60
Total interest-bearing deposits
3,539,271
4,211
0.47
3,630,282
7,298
0.80
FHLB and short-term borrowings
278,154
1,275
1.82
479,475
1,803
1.50
Trust preferred securities, net of fair value adjustments
988
24
9.63
944
24
10.19
Non-interest-bearing deposits
909,750
-
-
714,337
-
-
Cost of funds
4,728,163
$
5,510
0.46
%
4,825,038
$
9,125
0.75
%
Other liabilities
36,106
47,304
Stockholders’ equity
644,715
613,910
Total liabilities and stockholders’
equity
$
5,408,984
$
5,486,252
Net interest income - tax-equivalent
(1)
$
42,549
$
39,996
Net interest spread - tax-equivalent
(1)
3.16
%
2.91
%
Net interest margin - tax-equivalent
(1)
3.20
%
2.98
%
(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 include non-accrual loans of $48 million and $76 million as of September 30, 2021 and 2020, respectively.
(3)
Loan interest income includes loan fees of $4 million and $3 million for the quarter ended September 30, 2021 and 2020, respectively.
(4)
Actual unrounded values are used to calculate the reported yield or rate. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.
43
For the Nine Months Ended
September 30, 2021
September 30, 2020
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
$
207,691
$
2,911
1.87
%
$
285,363
$
4,982
2.33
%
Securities - tax-exempt
(1)
507,986
12,596
3.32
443,506
11,807
3.56
Federal funds sold
-
-
-
1,364
18
1.73
Interest-bearing deposits in other banks
390,588
359
0.12
170,316
566
0.44
Gross loans, net of unearned income
(2)(3)
4,381,213
130,268
3.98
4,248,520
138,591
4.36
Total interest-earning assets
(1)
5,487,478
$
146,134
3.56
%
5,149,069
$
155,964
4.05
%
Allowance for loan losses
(76,726)
(64,896)
Other non-interest-earning assets
214,752
218,797
Total assets
$
5,625,504
$
5,302,970
Interest-bearing liabilities
Transaction deposits
$
629,959
$
936
0.20
%
$
404,967
$
1,391
0.46
%
Savings and money market deposits
2,360,559
6,402
0.36
1,938,669
11,689
0.81
Time deposits
863,592
7,451
1.15
1,178,632
16,895
1.91
Total interest-bearing deposits
3,854,110
14,789
0.51
3,522,268
29,975
1.14
FHLB and short-term borrowings
285,371
3,841
1.80
456,048
5,145
1.51
Trust preferred securities, net of fair value adjustments
976
72
9.80
933
82
11.81
Non-interest-bearing deposits
814,924
-
-
668,208
-
-
Cost of funds
4,955,381
$
18,702
0.50
%
4,647,457
$
35,202
1.01
%
Other liabilities
35,385
42,731
Stockholders’ equity
634,738
612,782
Total liabilities and stockholders’
equity
$
5,625,504
$
5,302,970
Net interest income - tax-equivalent
(1)
$
127,432
$
120,762
Net interest spread - tax-equivalent
(1)
3.06
%
3.04
%
Net interest margin - tax-equivalent
(1)
3.10
%
3.13
%
(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 include non-accrual loans of $48 million and $76 million as of September 30, 2021 and 2020, respectively.
(3)
Loan interest income includes loan fees of $13 million and $10 million for the nine months ended September 30, 2021 and 2020, respectively.
(4)
Actual unrounded values are used to calculate the reported yield or rate. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.
44
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 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).
For the Quarter Ended
For the Nine Months Ended
September 30, 2021 over 2020
September 30, 2021 over 2020
Average Volume
Yield/Rate
Net Change
(2)
Average Volume
Yield/Rate
Net Change
(2)
(Dollars in thousands)
Interest Income
Securities - taxable
$
(307)
$
(19)
$
(326)
$
(1,200)
$
(871)
$
(2,071)
Securities - tax-exempt
(1)
782
(327)
455
1,627
(838)
789
Federal funds sold
-
-
-
(18)
-
(18)
Interest-bearing deposits in other banks
51
23
74
390
(597)
(207)
Gross loans, net of unearned income
(2,403)
1,138
(1,265)
4,176
(12,499)
(8,323)
Total interest income
(1)
$
(1,877)
$
815
$
(1,062)
$
4,975
$
(14,805)
$
(9,830)
Interest Expense
Transaction deposits
$
26
$
(27)
$
(1)
$
555
$
(1,010)
$
(455)
Savings and money market deposits
304
(698)
(394)
2,185
(7,472)
(5,287)
Time deposits
(1,414)
(1,278)
(2,692)
(3,795)
(5,649)
(9,444)
Total interest-bearing deposits
(1,084)
(2,003)
(3,087)
(1,055)
(14,131)
(15,186)
FHLB and short-term borrowings
(863)
335
(528)
(2,169)
865
(1,304)
Trust preferred securities, net of fair value adjustments
1
(1)
-
4
(14)
(10)
Total interest expense
(1,946)
(1,669)
(3,615)
(3,220)
(13,280)
(16,500)
Net interest income
(1)
$
69
$
2,484
$
2,553
$
8,195
$
(1,525)
$
6,670
(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.
Interest income -
Interest income declined for the three- and nine-month periods ended September 30, 2021 compared to the same periods in 2020. For the three-month period
ended September 30, 2021 compared to the same period in 2020, the average loan balance declined $247 million or 6% resulting in lower interest income,
offset by higher yields on
loans, driven by a $907 thousand increase in loan fees that increased the current period loan yield 10 basis points compared to the
same period in 2020. For the nine-month period
ended September 30, 2021, lower yields on earning assets were driven by a decline in the interest rate environment. This decline
in asset yields was partially offset by year-over-year
loan growth and PPP loan income.
Interest expense
- Interest expense declined for the three- and nine-month periods ended September 30, 2021 compared to the same periods in 2020.
The cost of interest-bearing
deposits declined during the current periods due to strategic rate changes in our deposit products driven by the declining interest rate environment. For the three- and
nine-month
periods ended September 30, 2021 compared to the same periods in 2020, the average volume for interest-bearing deposits declined primarily because of time
deposit maturities and
current rates on time deposits.
45
Average FHLB and other borrowings declined for the three- and nine-month periods ended September 30, 2021 compared to the same periods in 2020, as the Company’s
increase in cash offset the need to renew or increase these borrowings. The increase in the cost of FHLB borrowings was the result of short-term duration borrowings
with lower
rates that matured in 2020 and were not renewed.
Net interest income
- Net interest income increased for the three- and nine-month periods ended September 30, 2021 compared to the same periods in
2020 driven by rate and
volume declines in interest-bearing liabilities. The Company anticipates net interest margin to remain
stable or slightly decline during the fourth quarter of 2021 as time deposits
continue to mature at higher rates, offset by lower yields on earning assets.
Impact of Transition Away from LIBOR
The Company had more than $1.4 billion in loans tied to LIBOR at September 30, 2021. Starting in October 2021, the Company began limiting loans
originated using the
LIBOR index. For current borrowers, the Company is modifying loan document language to account for the transition away from LIBOR as loans
renew or originate. The Company
plans to replace LIBOR-based loans with the Secured Overnight Financing Rate. The Company adopted
Accounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform
(Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” in 2020. 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.
Non-Interest Income (Expense)
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2021
2021
2021
2020
2020
2021
2020
(Dollars in thousands)
Total non-interest income (expense)
$
(1,105)
$
5,825
$
4,144
$
2,949
$
4,063
$
8,864
$
8,792
Non-interest income (expense) to average assets
(1)
(0.08)
%
0.41
%
0.29
%
0.21
%
0.29
%
0.21
%
0.22
%
(1)
Interim periods annualized.
46
The components of non-interest income were as follows for the periods shown:
For the Quarter Ended
For the Nine Months Ended
September 30,
September 30,
Change
Change
2021
2020
$
%
2021
2020
$
%
(Dollars in thousands)
Service charges and fees on customer accounts
$
1,196
$
792
$
404
51
%
$
3,330
$
1,947
$
1,383
71
%
Realized gains on available-for-sale securities
1,046
1,012
34
3
1,043
1,725
(682)
(40)
Unrealized gains (losses), net on equity securities
(6,210)
-
(6,210)
-
(6,243)
53
(6,296)
(11,879)
Income from bank-owned life insurance
427
464
(37)
(8)
3,088
1,373
1,715
125
Swap fees and credit valuation adjustments, net
31
121
(90)
(74)
156
80
76
95
ATM and credit card interchange income
1,735
1,482
253
17
5,569
2,863
2,706
95
Other non-interest income
670
192
478
249
1,921
751
1,170
156
Total non-interest income (loss)
$
(1,105)
$
4,063
$
(5,168)
(127)
%
$
8,864
$
8,792
$
72
1
%
The changes in non-interest income were driven by the following:
Service charges and fees on customer accounts
- The increase for the three- and nine-month periods ended September 30, 2021 compared to the same
corresponding periods in
2020 was driven by a decline in costs associated with our rebate program, including a reduction in the funded balance and reduction in
rates used. In addition, customer growth and
an increase in transactions improved account analysis fees.
Realized gains on available-for-sale securities
- The increase for the three-month period ended September 30, 2021 compared to the same corresponding
period in 2020 resulted
from the sale of $16 million in tax-exempt securities compared to $13 million of tax-exempt securities sold during the three-month period ended
September 30, 2020. The decline for
the nine-month period ended September 30, 2021 compared to the same corresponding period in 2020 was due to an additional $19 million of tax-exempt securities
sold in 2020.
The sales were a strategic decision by management to capitalize on attractive market conditions and improve
credit quality.
Unrealized gains (losses), net on equity securities
- During the quarter ended September 30, 2021, the Company recorded a $6 million unrealized loss related to an equity
investment received as part of a modified loan agreement. The Company elected to account for this security
at cost minus impairment, unless an orderly transaction for an identical
or similar investment of the same issuer occurred that would result in an updated fair market value. Prior to the quarter ended September 30, 2021, the equity investment’s
key
performance indicators were stable and no impairment indicators arose. During the three-month period ended September 30, 2021, significant adverse changes
in market conditions
for the investment resulted in the impairment review. The Company anticipates the equity investment will
be sold during the fourth quarter of 2021.
Income from bank-owned life insurance
- The increase for the nine-month period ended September 30, 2021 was due to the Company recognizing $2 million in
tax-free death
benefits from a bank-owned life insurance policy during the second quarter of 2021 compared to $0 of such proceeds for the nine-month period ended
September 30, 2020.
Swap Fee and Credit Valuation Adjustments,
Net
- This category includes swap fees from the execution of new swaps and the credit valuation adjustment (“CVA”). Swap fees on
new swaps depend on the size and term of the underlying asset. During the three- and nine-month periods ended
September 30, 2021, no new swaps were executed compared to one
and three new swaps for the three- and nine-month periods ended September 30, 2020, respectively. The low volume of new swaps was due to
management's loan and pricing
strategy and lower long-term interest rates.
47
ATM and Credit Card Interchange Income
- The increase in ATM and credit card
interchange income for the three- and nine-month periods ended September 30, 2021 compared
to the same periods in 2020 was primarily the result of customers that mobilized their workforce directly impacted by the COVID-19 pandemic.
The Company saw a $229 thousand
increase for the three-month period ended September 30, 2021 compared to the prior three-month period ended June 30, 2021 as COVID-19 cases increased.
The Company
anticipates the credit card activity and related income will continue to fluctuate in connection with changes in COVID-19 cases
and the related vaccine rollout.
Other non-interest income
- The increase in other non-interest income for the three- and nine-month periods ended September 30, 2021 compared
to the same periods in 2020 was
related to $305 thousand and $183 thousand in state employment incentives received in the third and second
quarter of 2021, respectively. We expect to receive the incentives
quarterly going forward for three years, but at significantly lower amounts. The Company also saw a $367 thousand increase
in letter of credit and foreign exchange fees for the nine-
month period ended September 30, 2021 compared to the corresponding period in 2020.
Non-Interest Expense
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2021
2021
2021
2020
2020
2021
2020
(1)
(Dollars in thousands)
Total non-interest expense
$
24,036
$
25,813
$
22,818
$
23,732
$
23,011
$
72,667
$
76,244
Non-interest expense to average assets
(2)
1.76
%
1.82
%
1.60
%
1.71
%
1.67
%
1.73
%
1.92
%
(1)
Total non-interest expense includes $7 million related to goodwill impairment.
(2)
Interim periods annualized.
The components of non-interest expense were as follows for the periods indicated:
For the Quarter Ended
For the Nine Months Ended
September 30,
September 30,
Change
Change
2021
2020
$
%
2021
2020
$
%
(Dollars in thousands)
Salary and employee benefits
$
15,399
$
14,628
$
771
5
%
$
44,612
$
43,022
$
1,590
4
%
Occupancy
2,416
2,144
272
13
7,307
6,274
1,033
16
Professional fees
618
1,132
(514)
(45)
2,538
3,098
(560)
(18)
Deposit insurance premiums
927
1,096
(169)
(15)
2,995
3,151
(156)
(5)
Data processing
700
652
48
7
2,136
2,065
71
3
Advertising
596
147
449
305
1,334
870
464
53
Software and communication
999
959
40
4
3,098
2,772
326
12
Foreclosed assets, net
(35)
20
(55)
(275)
680
1,174
(494)
(42)
Goodwill impairment
-
-
-
-
-
7,397
(7,397)
(100)
Other non-interest expense
2,416
2,233
183
8
7,967
6,421
1,546
24
Total non-interest expense
$
24,036
$
23,011
$
1,025
4
%
$
72,667
$
76,244
$
(3,577)
(5)
%
The changes in non-interest expense were driven by the following:
48
Salary and Employee Benefits
- Salary and employee benefit costs increased for the three- and nine-month periods ended September 30, 2021 compared to the same periods in
2020 primarily due to an increase in anticipated payouts for performance-based awards that resulted from improved earnings
and asset quality metrics, partially offset by changes in
employee headcount. During the nine-month period ended September 30, 2021, the Company recognized $719 thousand in costs due to accelerated vesting
of stock-based awards
and the annual incentive award of a former employee.
Occupancy
- Occupancy costs increased for the three- and nine-month periods ended September 30, 2021 compared to the same periods in
2020 primarily due to our new locations
in the rapidly growing Frisco, Texas market and Phoenix,
Arizona market and our more prominent location on the Country Club Plaza, in Kansas City, Missouri.
Professional Fees
- Professional fees declined for the three- and nine-month periods ended September 30, 2021 compared to the same
corresponding periods in 2020 primarily from
a reduction in legal fees related to PPP loan originations and loan
workouts.
Deposit Insurance Premiums
- The FDIC uses a risk-based premium system to calculate quarterly fees. Our costs fluctuate because of changes
in asset growth, changes in asset
quality and changes in capital ratios.
Advertising
- The increase in advertising costs was driven by increased in-person events for the three- and nine-month periods
ended September 30, 2021 compared to the same
periods in 2020 because of COVID-19 pandemic restrictions being lifted.
Software and Communication
- Software and communication costs increased for the three- and nine-month periods ended September 30, 2021 compared to the same periods in
2020 primarily due to our continued strategy to invest in technologies that allow us to cover beginning-to-end loan originations, provide
customers with a suite of online tools and
analyze operational trends. In addition to the growing number of technologies implemented, a portion of costs increased because of our growth.
Foreclosed Assets, net
- During the three-month period ended September 30, 2021, the Company sold a commercial use facility foreclosed upon in 2020 and raw land acquired
in
2019. The facility was previously written down by $630 thousand during the three-month period ended
June 30, 2021. The value of industrial facilities and raw land foreclosed upon
in 2019 was reduced by $1 million during the nine-month period ended September 30, 2020.
Goodwill Impairment
- The Company performed an interim review for goodwill impairment in 2020.
A quantitative review was performed on the Tulsa market
reporting unit and
resulted in a $7 million impairment.
Other Non-interest Expense
- Other non-interest expense increased for the three- and nine-month periods ended September 30, 2021 compared to the same periods
in 2020
primarily due to a $43 thousand and $1 million increase in commercial card costs, respectively, as a result of our growing customer
base and increased use as a result of the COVID-
19 pandemic. In addition, insured cash sweep (“ICS”) deposits increased in 2021 from 2020, which drove related fees higher.
Income Taxes
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2021
2021
2021
2020
2020
2021
2020
(Dollars in thousands)
Income tax expense
$
5,660
$
3,263
$
2,908
$
1,785
$
1,498
$
11,831
$
928
Income before income taxes
26,660
18,840
14,943
9,879
9,504
60,443
5,435
Effective tax rate
21
%
17
%
19
%
18
%
16
%
20
%
17
%
49
Our income tax expense differs from the amount that would be calculated using the federal statutory tax rate, primarily from investments in tax advantaged
assets, including
bank-owned life insurance and tax-exempt municipal securities; state tax credits; and permanent tax differences from goodwill impairment
and equity-based compensation. During
the three-month period ended September 30, 2021, the Company’s effective tax rate was impacted by improved net income before taxes of $8 million
or 42% while tax-exempt
income declined $2 million or 31%. During the three-month period ended June 30, 2021, the Company benefited from
$2 million in bank owned life insurance settlement benefits
that reduced income taxes by $387 thousand and reduced the effective tax rate by approximately 2%. We
anticipate the Company’s effective tax rate to remain within the 19% to
21% range in the near term. Refer to “Note 10: Income Tax” within the Notes to the Unaudited Financial Statements for more information.
Analysis of Financial Condition
Securities Portfolio
The securities portfolio is maintained to serve as a contingent, on-balance sheet source of liquidity.
The objective of the investment portfolio is to optimize earnings, manage
credit and interest rate risk, ensure adequate liquidity, and meet pledging and regulatory capital requirements.
As of September 30, 2021, available-for-sale investments totaled $708
million, an increase of $54 million from December 31, 2020. 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 Notes to the Unaudited Consolidated Financial Statements for additional information
regarding the Company’s loan portfolio. As of September 30, 2021, gross loans declined
$209 million or 5% from December 31, 2020 and was driven by the following:
Commercial
- The $33 million or 2% decline in commercial loans was driven by $12 million of charge-offs taken, an increase in paydowns and
$28 million of loans sold to a third-
party.
Energy
- Our energy portfolio decreased $49 million or 14% from December 31, 2020 to September 30, 2021 primarily due to paydowns on outstanding lines of credit.
Commercial Real Estate and Construction and Land Development
- The $109 million or 6% increase was driven by strong originations and customer drawdowns on lines of
credit primarily for commercial projects.
Residential and Multifamily Real Estate
- The $60 million or 9% decline was driven by payoffs of several, larger credit facilities.
PPP
- PPP loans decreased $183 million or 63% from December 31, 2020 to September 30, 2021. PPP
loan activity is detailed in the
section within
Management’s Discussion and Analysis. 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.
The following table shows the contractual maturities of our gross loans and sensitivity to interest rate changes:
50
As of September 30, 2021
Due in One Year or Less
Due after One Year through
Five Years
Due after Five Years through
Fifteen Years
Due after Fifteen Years
Fixed Rate
Adjustable Rate
Fixed Rate
Adjustable Rate
Fixed Rate
Adjustable Rate
Fixed Rate
Adjustable Rate
Total
(Dollars in thousands)
Commercial
$
60,715
$
282,092
$
254,938
$
604,032
$
15,924
$
87,835
$
-
$
-
$
1,305,536
Energy
123
79,516
10,232
206,494
-
-
-
-
296,365
Commercial real estate
100,854
106,795
326,161
404,293
85,820
235,222
-
7,549
1,266,694
Construction and land
development
6,944
66,893
35,954
411,689
5,242
27,522
4,163
26,727
585,134
Residential and multifamily real
estate
23,401
61,161
73,950
112,716
100,496
8,667
22
240,464
620,877
PPP
11,643
-
97,822
-
-
-
-
-
109,465
Consumer
19,546
11,116
2,623
5,478
-
20,997
-
2,353
62,113
Gross loans
$
223,226
$
607,573
$
801,680
$
1,744,702
$
207,482
$
380,243
$
4,185
$
277,093
$
4,246,184
Provision and Allowance for Loan Losses (“ALLL”)
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2021
2021
2021
2020
2020
2021
2020
(Dollars in thousands)
Provision for loan losses
$
(10,000)
$
3,500
$
7,500
$
10,875
$
10,875
$
1,000
$
45,825
Allowance for loan losses
64,152
75,493
74,551
75,295
76,035
64,152
76,035
Net charge-offs
$
1,341
$
2,558
$
8,244
$
11,615
$
6,025
$
12,143
$
26,686
51
Refer to “Note 4: Loans and Allowance for Loan Losses (“ALLL”)”
within the Notes to the Unaudited Consolidated Financial Statements for information regarding the
Company’s ALLL
process. The ALLL
at September 30, 2021 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 as of the dates
indicated:
September 30, 2021
December 31, 2020
Amount
Percent of
Allowance to Total
Allowance
Percent of Loan
Type to Total Loans
Amount
Percent of
Allowance to Total
Allowance
Percent of Loan
Type to Total Loans
(Dollars in thousands)
Commercial
$
23,921
37
%
31
%
$
24,693
33
%
30
%
Energy
12,548
20
7
18,341
24
8
Commercial real estate
18,945
30
30
22,354
29
26
Construction and land development
3,191
5
14
3,612
5
13
Residential and multifamily real estate
5,270
8
15
5,842
8
15
PPP
-
-
2
-
-
7
Consumer
277
-
1
453
1
1
Gross loans
$
64,152
100
%
100
%
$
75,295
100
%
100
%
A discussion of the changes in the
ALLL is provided below:
Charge-offs and Recoveries:
During the three months ended September 30, 2021, charge-offs primarily related to one commercial loan and one energy
loan. The energy charge-off related to the sale of
collateral from a borrower that filed for bankruptcy in a previous year.
Approximately $2 million remains on the energy loan at September 30, 2021. Recoveries totaled $234
thousand for the three months ended September 30, 2021 primarily from a commercial loan that was previously charged-off in 2020. During the three months ended June 30, 2021,
charge-offs primarily related to a commercial borrower. During the three months ended March 31, 2021, charge-offs primarily related to two commercial borrowers that
were unable
to support their debt obligations.
During the three months ended September 30, 2020, the Company 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 three months ended June 30, 2020, the Company
charged-off one energy loan
that was classified for several years and accounted for most net charge-offs. For the three months 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 $1 million related to one oil exploration and production credit.
The below table provides the ratio of net charge-offs (recoveries) to average loans outstanding based on our loan categories for the periods indicated:
52
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2021
2021
2021
2020
2020
2021
2020
Commercial
0.27
%
0.84
%
2.47
%
2.07
%
1.72
%
1.23
%
2.06
%
Energy
0.64
-
-
3.16
-
0.20
0.74
Commercial real estate
-
-
-
0.53
-
-
-
Construction and land development
-
-
-
-
-
-
-
Residential and multifamily real estate
-
-
-
(0.02)
0.18
-
0.12
PPP
-
-
-
-
-
-
-
Consumer
(0.02)
(0.03)
-
-
(0.09)
(0.02)
0.27
Total net charge-offs to average loans
0.13
%
0.23
%
0.74
%
1.03
%
0.54
%
0.37
%
0.84
%
(1)
Interim periods annualized.
Impact of Risk Rating and Loan Balance Changes:
The Company upgraded approximately $109 million and $239 million of loans during the three-month and nine-month periods ended September 30, 2021, respectively,
and
downgraded $73 million and $137 million during the same, respective periods. Risk rating changes resulted in a $2 million and $5 million reduction in
the required reserve for the
three- and nine-month periods ended September 30, 2021, respectively.
Changes in loan balances, including payoffs and originations, reduced the required reserve by $8 million between December 31, 2020 and September 30, 2021.
Changes in the quantitative and qualitative factors on pass rated loans increased the allowance by approximately $600 thousand between
December 31, 2020 and September
30, 2021. The increase was driven by the commercial loan portfolio that had elevated charge-offs over the past five quarters.
The charge-offs impacted the commercial loan historical
loss factor that resulted in a $2 million increase to the required reserve during the nine months ended September 30, 2021.
The Company downgraded approximately $833 million of loans between December 31, 2019 and September 30, 2020, including $731 million in the second quarter
of 2020,
representing 17% of the June 30, 2020 loan portfolio. Downgrades primarily resulted from the COVID-19 pandemic, lower economic activity, and
lower oil and gas prices. The
energy, commercial and commercial real estate portfolios were significantly impacted.
Impaired Loans and Other Factors:
Impaired loans declined $27 million between December 31, 2020 and September 30, 2021, driven by $19 million of loans upgraded, including an $8 million loan
upgraded
due to an increase in capital, and a $10 million decline as a result of payments made by several borrowers offset by approximately $9 million of loans impaired during the
nine
months ended September 30, 2021. The remainder of the change related to loan paydowns and charge-offs.
The reduction in impaired loans and related reserve reduced the
ALLL by
$2 million.
For the nine-month period ended September 30, 2020, the impaired loan portfolio 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 declines in
economic activity and the COVID-19 pandemic.
53
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
debt securities.
Nonaccrual loans declined $7 million during the quarter ended September 30, 2021 primarily due to $1.6 million in charge-offs related to nonaccrual loans, $3 million
placed
back on accrual and paydowns on several loans, offset by a few commercial loans placed on nonaccrual.
Nonaccrual loans declined $9 million during the quarter ended June 30, 2021 primarily due to $6 million of loans placed back on accrual status due to payments made or
being in the process of collection. In addition, two commercial loans were able to pay down their outstanding balance that
decreased the nonaccrual total by $5 million. The
reductions were offset by a $3 million commercial loan that matured in the first quarter of 2021 and for which the borrower was unable to make the required payments.
Nonaccrual loans declined $12 million during the three months ended March 31, 2021 primarily due to one commercial real estate
loan borrower that recapitalized its balance
sheet and was placed back on accrual. In addition, several commercial borrowers were able to pay down a portion of the outstanding loan balance during the three months ended
March 31, 2021. Nonaccrual energy loans increased slightly between December 31, 2020 and March 31, 2021 as oil and natural gas borrowers struggled from the effects of low oil
and gas prices over the past year.
During 2020, nonaccrual loans increased primarily from energy loans, impacted by low oil and natural gas prices, that did not meet the criteria to be modified
under the
CARES Act, several loans impacted by the COVID-19 pandemic and a commercial
loan participation that was restructured in the fourth quarter of 2020.
Foreclosed assets held-for-sale declined $570 thousand during the three-month period ended September 30, 2021 due to the sale of land and commercial
real estate. During the
three-month period ended June 30, 2021, the Company had previously recorded a $630 thousand write-down on this commercial property.
The table below summarizes our nonperforming assets and related ratios as of the dates indicated:
54
For the Quarter Ended
September 30,
June 30,
March 31,
December 31,
September 30,
2021
2021
2021
2020
2020
(Dollars in thousands)
Nonaccrual loans
$
48,147
$
54,652
$
63,319
$
75,051
$
75,560
Loans past due 90 days or more and still accruing
342
1,776
3,183
1,024
4,324
Total nonperforming loans
48,489
56,428
66,502
76,075
79,884
Foreclosed assets held for sale
1,148
1,718
2,347
2,347
2,349
Total nonperforming assets
$
49,637
$
58,146
$
68,849
$
78,422
$
82,233
ALLL to total loans
1.51
%
1.78
%
1.65
%
1.70
%
1.70
%
ALLL to nonaccrual loans
133.24
138.14
117.74
100.33
100.63
ALLL to nonperforming loans
132.30
133.79
112.10
98.98
95.18
Nonaccrual loans to total loans
1.13
1.29
1.40
1.69
1.68
Nonperforming loans to total loans
1.15
1.33
1.48
1.71
1.78
Nonperforming assets to total assets
0.92
%
1.09
%
1.15
%
1.39
%
1.49
%
55
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 are provided in “Note 4 Loans and Allowance for
Loan
Losses” in the Notes to the Unaudited Consolidated Financial Statements. The following table summarizes our loans
past due 30 - 89 days, classified assets and related ratios as of
the dates indicated:
September 30,
June 30,
March 31,
December 31,
September 30,
2021
2021
2021
2020
2020
(Dollars in thousands)
Loan Past Due Detail
30 - 59 days past due
$
3,072
$
18,758
$
10,583
$
10,137
$
15,324
60 - 89 days past due
34,528
10
403
7,941
30,027
Total 30 - 89 days past due
$
37,600
$
18,768
$
10,986
$
18,078
$
45,351
Loans 30 - 89 days past due / gross loans
0.89
%
0.44
%
0.24
%
0.41
%
1.01
%
Classified Loans
Substandard - performing
$
75,999
$
116,078
$
205,560
$
211,008
$
224,352
Substandard - nonperforming
45,063
49,300
57,967
70,734
67,765
Doubtful
3,084
5,352
5,352
4,315
7,794
Loss
-
-
-
-
-
Total classified loans
124,146
170,730
268,879
286,057
299,911
Foreclosed assets held for sale
1,148
1,718
2,347
2,347
2,349
Total classified assets
$
125,294
$
172,448
$
271,226
$
288,404
$
302,260
Classified loans / (total capital + ALLL)
17.3
%
24.0
%
38.2
%
40.9
%
43.2
%
Classified assets / (total capital + ALLL)
17.5
%
24.2
%
38.6
%
41.2
%
43.6
%
The Company’s classified assets as of September 30, 2021 declined $47 million since June 30, 2021. The decline was driven by $25 million
in energy loans upgraded and $2
million in energy paydowns because of improved oil prices. In addition, $18 million of commercial and commercial real estate loans
were upgraded due to improved market
conditions.
The Company's classified assets as of June 30, 2021 declined $99 million since March 31, 2021. The decline was driven by $18 million in loan payoffs,
$56 million in loans
upgraded, $35 million in pay downs partially offset by $11 million of new or increased loan balances. The decrease in classified assets
was primarily related to commercial, energy
and commercial real estate loans that improved due to better economic conditions.
The Company's classified assets as of March 31, 2021 decreased $17 million from December 31, 2020. The decline was driven
by $30 million of commercial and commercial
real estate loans upgraded due to improvements in the borrowers’
capital structure and $8 million in paydowns from classified loans, offset by an increase of approximately $21
million in downgraded loans, primarily from our energy and commercial loan portfolio.
56
Deposits and Other Borrowings
The following table sets forth the maturity of time deposits as of September 30, 2021:
As of September 30, 2021
Three Months or Less
Three to Six Months
Six to Twelve Months
After Twelve Months
Total
(Dollars in thousands)
Time deposits in excess of FDIC insurance limit
$
61,242
$
76,399
$
87,670
$
29,146
$
254,457
Time deposits below FDIC insurance limit
121,859
107,007
132,187
85,611
446,664
Total
$
183,101
$
183,406
$
219,857
$
114,757
$
701,121
At September 30, 2021, our deposits totaled $4 billion, a decrease of $258 million or 5% from December 31, 2020. Of this decrease, $158 million were money market, NOW
and savings deposits and $342 million were time deposits. Declines were offset by a $243 million increase in non-interest bearing deposits. The decline in money market, NOW and
savings deposits was driven by required payments from our customers to the Internal Revenue Service and interest rate competition. The decrease in time deposits resulted from
maturities and the low interest rate environment.
Other borrowings include FHLB advances, repurchase agreements and our trust preferred security. At September 30, 2021, other borrowings totaled $278 million, a $19 million
or 6% decrease from December 31, 2020. The decline was driven by borrowings that matured and were not replaced during the nine months ended September 30,
2021 due to
increased Company liquidity.
As of September 30, 2021, the Company had approximately $190 million of deposits with one customer relationship. The Company evaluated
the deposit concentration and
determined that a significant reduction to these deposits would not adversely impact the Company as sufficient liquidity is accessible
and at favorable rates.
As of September 30, 2021, the Company had approximately $2.5 billion of uninsured deposits, which is an estimated amount based on the same methodologies and assumptions
used for the Bank’s regulatory requirements. The Company believes that its current capital ratios and liquidity are sufficient to mitigate the risks of uninsured deposits.
57
Liquidity
The Company’s liquidity 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 as of the dates indicated:
September 30, 2021
December 31, 2020
(Dollars in thousands)
Total on-balance sheet liquidity
$
1,027,051
$
1,046,110
Total off-balance sheet liquidity
715,089
756,325
Total liquidity
$
1,742,140
$
1,802,435
On-balance sheet liquidity as a percent of assets
19
%
19
%
Total liquidity as a percent of assets
32
%
32
%
The Company believes that its current liquidity will be sufficient to meet anticipated cash requirements for the next 12 months.
Subsequent to September 30, 2021, the Company's Board of Directors authorized a stock repurchase program under which the Company
may repurchase up to $30 million of
common stock over time. The actual timing, number and value of shares of common stock repurchased under the stock repurchase
program will be determined by management at its
discretion and will depend on a number of factors, including, but not limited to, the market price of the Company's common stock, general market and economic conditions, and
applicable legal requirements. Stock repurchases under the program may be modified, suspended or terminated by the Company at any time without prior
notice. Under the stock
repurchase program, the Company may repurchase its common stock in the open market, through block trades, in privately negotiated transactions,
pursuant to a trading plan
separately adopted in the future, or by other means, in accordance with federal securities laws and other applicable laws.
Contractual Obligations
In the first quarter of 2021, the Company entered into an agreement with a third-party, venture capital firm. The
Company invested $308 thousand during the nine months
ended September 30, 2021 and will invest up to $3 million into the venture capital fund. The fund was designed to invest in companies that
find solutions for community banks and
help accelerate technology adoption for community banks.
Refer to “Note 6: Time Deposits and Borrowings” within the Notes to the Unaudited Consolidated Financial
Statements for our significant contractual cash obligations to third
parties. In addition, the Company has various lease agreements with approximately $30 million of future minimum lease payments at September
30, 2021.
Contractual obligations may be satisfied through our on-balance sheet and off-balance sheet liquidity discussed above.
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. The regulatory
capital requirements involve
quantitative measures of the Company’s assets, liabilities, select off-balance sheet items and equity. 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. Refer to “Note 8:
58
Regulatory Matters” in the Notes to the Unaudited Consolidated Financial Statements for additional information. Management
believes that as of September 30, 2021, the Company
and the Bank met all capital adequacy requirements to which they are subject.
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.
Refer to “Note 12:
Commitments and Credit Risk” in the Notes to Unaudited Consolidated Financial Statements for a breakout of our off-balance sheet arrangements.
As of September 30, 2021, the
Company believes it has sufficient access to liquid assets to support the funding of these commitments.
Critical Accounting Policies and Estimates
The Company identified several accounting policies that are critical to an understanding of our financial condition and results of
operations. 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 Accounting Policies
and Estimates” in Management’s Discussion and
Analysis of Financial Condition and Results of Operations included in the 2020
Form 10-K.
There have been no additional changes in the Company’s application of critical accounting policies since December 31, 2020.
Recent Accounting Pronouncements
Refer to “Note 1: Nature of Operations and Summary of Significant Accounting
Policies” included in the Notes to the Unaudited Consolidated Financial Statements included
elsewhere in this Form 10-Q.
59
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
A primary component of market risk is interest rate
volatility. Interest rate risk management is a key element of the Company’s
balance sheet management. Interest rate risk is the risk that 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; 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 Funds Management Committee (“FMC”).
The FMC uses a combination of
three systems to measure the balance sheet’s interest rate risk position. 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, 2021
September 30, 2020
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
6.4
%
(8.9)
%
1.2
%
(7.2)
%
+200
3.6
(5.7)
1.0
(3.2)
+100
1.1
(3.0)
0.3
(0.8)
Base
-
%
-
%
-
%
-
%
-100
NA
(1)
NA
(1)
NA
(1)
NA
(1)
-200
NA
(1)
NA
(1)
NA
(1)
NA
(1)
(1)
The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment.
Hypothetical Change in Interest Rate - Rate Ramp
September 30, 2021
September 30, 2020
Change in Interest Rate
(Basis Points)
Percent change in net interest
income
Percent change in net interest
income
+300
2.5
%
1.3
%
+200
1.2
0.8
+100
0.2
0.3
Base
-
%
-
%
-100
NA
(1)
NA
(1)
-200
NA
(1)
NA
(1)
(1)
The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment.
60
The Company’s position is slightly asset sensitive as of September 30, 2021. During the three-month period ended September 30,
2021, $88 million in PPP loans were paid off and was the main driver of the change in asset sensitivity
to the prior quarter. The
hypothetical change in net interest income as of September 30, 2021 in an up 100 basis point shock is mainly due to floors on variable
rate loans that limit interest income growth as rates start to rise. In addition, the Company reduced wholesale deposits and
time deposits
to lower interest rate sensitivity in the current low-rate environment.
As a result, our interest-bearing liabilities reprice at a similar speed
as our earning assets in an up 100 basis point rate environment. The FMC has several options available, including an increase in
fixed-
rate deposits and using on balance sheet derivatives, that could reduce the short-term, negative impact of a rising interest rate
environment. The Company anticipates the use of cash flow hedges in the near term to manage rate sensitivity.
Approximately 66% of
the Company’s earning assets reprice or mature over the next 12 months.
The models the Company uses include assumptions regarding interest rates 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.
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”)) as of September 30, 2021. 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, 2021.
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 2021 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.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report and the updated risk factor below, you should carefully consider the
factors discussed in Part I, "Item 1A. Risk Factors" in our 2020 Form 10-K, which could materially affect our business, financial condition
or results of operations in future periods.
We may not be able to manage the risks associated with our anticipated growth and expansion through de novo branching.
Our business strategy includes evaluating potential strategic opportunities to grow through de novo branching. We are in the
process of opening a de novo branch in Phoenix, Arizona. De novo branching carries with it certain potential risks, including significant
61
startup costs and anticipated initial operating losses; an inability to gain regulatory approval; an inability to secure the services
of qualified
senior management to operate the de novo banking location and successfully integrate and promote our corporate culture; poor market
reception for de novo banking locations established in markets where we do not have a preexisting reputation; challenges posed by local
economic conditions; challenges associated with securing attractive locations at a reasonable cost; and the additional strain on
management resources and internal systems and controls. Failure to adequately manage the risks associated with our anticipated
growth
through de novo branching could have an adverse effect on our business, financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
None.
62
ITEM 6. EXHIBITS
 
The exhibits listed in the exhibit index below are filed with this Amendment No. 1 to Quarterly Report on Form 10-
Q/A.
Exhibit
Number
Exhibit Description
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)
*
Filed Herewith
**
Furnished Herewith
†
Indicates a compensatory Planherewith
 
63
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.
November 2, 2021April 12, 2022
/s/ Benjamin R. Clouse
 
Benjamin R. Clouse
 
Chief Financial Officer
 
(Principal Financial Officer and Principal Accounting
Officer)