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WASHINGTON, D.C. 20549
FORM
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2
CrossFirst Bankshares, Inc.
Form 10-Q for the Quarter Ended September 30, 2022
Index
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Forward-Looking Information
4
5
6
7
9
Notes to Condensed Consolidated Financial Statements (unaudited)
10
15
15
19
37
39
39
39
40
42
43
47
47
47
49
49
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
50
52
52
56
57
59
60
60
60
61
64
67
68
69
71
72
Part II. Other Information
72
72
73
74
75
3
Forward-Looking Information
All statements contained in this quarterly report on Form 10-Q that do not directly and exclusively relate to historical facts
constitute forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as
“may,” “might,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,”
“plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative of these words or other
comparable words or phrases of a future or forward-looking nature. For example, our forward-looking statements include statements
regarding our expectations, opportunities or plans for growth; the proposed acquisition of Farmers & Stockmens Bank, the bank
subsidiary of Central Bancorp, Inc. (collectively, Farmers & Stockmens Bank and Central Bancorp, Inc. are herein referred to as
“Central”); our anticipated expenses, cash requirements and sources of liquidity; and our capital allocation strategies and plans.
Unless we state otherwise or the context otherwise requires, references below to “we,” “our,” “us,” 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.
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, the Company cautions 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 the
Company believes 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 due to a number of factors,
including, without limitation: risks associated with the ongoing COVID-19 pandemic, decline in economic conditions in the United
States and the Company’s market areas, fluctuations in interest rates, business strategy execution, ability to manage growth and
expansion, new lines of business or new services, products or product enhancements, phase-out of the London Interbank Offered Rate
(LIBOR) and uncertainty relating to alternative reference rates, fluctuation of fair value of our investment securities, credit quality and
risk, commercial and residential real estate values, hiring and retention of key personnel, funding availability, competition with other
entities that offer financial services, changes in liquidity requirements, demand for loans in the Company’s market areas, changes in
accounting and tax principles, estimates made on income taxes, ability to keep pace with technological change, cybersecurity incidents
or other failures, disruptions or security breaches, fraud committed against the Company or our clients, failure of our third-party services
providers, reputational risks, intellectual property infringement, legislative and regulatory changes, risks inherent with proposed
business acquisitions, such as the acquisition and integration of Farmers & Stockmens Bank, and the failure to achieve projected
synergies; or other external events. Additional discussion of these and other risk factors can be found in our Annual Report on Form 10-
K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022, and
in our other filings with the SEC.
Except as required by law, the Company undertakes no obligation to update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes in our business, results of operations or financial condition over
time. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
See Notes to Condensed Consolidated Financial Statements (unaudited)
4
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2022
December 31, 2021
(1)
(Unaudited)
(Dollars in thousands)
Assets
Cash and cash equivalents
$
$
Available-for-sale securities - taxable
Available-for-sale securities - tax-exempt
Loans, net of unearned fees
Allowance for credit losses on loans
(2)
Loans, net of the allowance for credit losses on loans
Premises and equipment, net
Restricted equity securities
Interest receivable
Foreclosed assets held for sale
Bank-owned life insurance
Other
Total assets
$
$
Liabilities and stockholders’ equity
Deposits
Non-interest-bearing
$
$
Savings, NOW and money market
Time
Total deposits
Federal Home Loan Bank advances
Other borrowings
Interest payable and other liabilities
Total liabilities
Stockholders’ equity
Common stock, $
Authorized -
September 30, 2022 and December 31, 2021, respectively
Treasury stock, at cost:
2021, respectively
(59,328 )
(28,347 )
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
(84,449 )
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
(1)
The year-end Condensed Consolidated Balance Sheet was derived from audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the United States of America.
(2)
As of December 31, 2021, this line represents the allowance for loan and lease losses. See further discussion in “Note 1: Nature of
Operations and Summary of Significant Accounting Policies”
in the Notes to Condensed Consolidated Financial Statements
(unaudited).
See Notes to Condensed Consolidated Financial Statements (unaudited)
5
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands except per share data)
Interest Income
Loans, including fees
$
$
$
$
Available-for-sale securities - taxable
Available-for-sale securities - tax-exempt
Deposits with financial institutions
Dividends on bank stocks
Total interest income
Interest Expense
Deposits
Fed funds purchased and repurchase agreements
Federal Home Loan Bank Advances
Other borrowings
Total interest expense
Net Interest Income
Provision for Credit Losses
(1)
(10,000 )
Net Interest Income after Provision for Credit Losses
(1)
Non-Interest Income
Service charges and fees on customer accounts
Realized (losses) gains on available-for-sale securities
(4 )
(43 )
Unrealized gains (losses) on equity securities, net
(87 )
(6,210 )
(261 )
(6,243 )
Income from bank-owned life insurance
Swap fees and credit valuation adjustments, net
(7 )
ATM and credit card interchange income
Other non-interest income
Total non-interest income
(1,105 )
Non-Interest Expense
Salaries and employee benefits
Occupancy
Professional fees
Deposit insurance premiums
Data processing
Advertising
Software and communication
Foreclosed assets, net
(35 )
(30 )
Other non-interest expense
Total non-interest expense
Net Income Before Taxes
Income tax expense
Net Income
$
$
$
$
Basic Earnings Per Share
$
$
$
$
Diluted Earnings Per Share
$
$
$
$
(1)
For the three- and nine-months ended September 30, 2021, this line represents the provision for loan and lease losses. See further
discussion of this change in “Note 1: Nature of Operations and Summary of Significant Accounting Policies”
in the Notes to
Condensed Consolidated Financial Statements (unaudited).
See Notes to Condensed Consolidated Financial Statements (unaudited)
6
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
Net Income
$
$
$
$
Other Comprehensive Loss
Unrealized loss on available-for-sale securities
(39,299 )
(7,989 )
(137,282 )
(11,532 )
Less: income tax benefit
(9,621 )
(1,956 )
(33,607 )
(2,823 )
Unrealized loss on available-for-sale securities
(29,678 )
(6,033 )
(103,675 )
(8,709 )
Reclassification adjustment for realized gains (losses) included in
income
(4 )
(43 )
Less: income tax expense (benefit)
(1 )
(11 )
Less: reclassification adjustment for realized gain (loss) included
in income, net of income tax
(3 )
(32 )
Unrealized loss on cash flow hedges
(7,076 )
(3,036 )
Less: income tax expense
(1,731 )
(741 )
Unrealized loss on cash flow hedges, net of income tax
(5,345 )
(2,295 )
Other comprehensive loss
(35,020 )
(6,823 )
(105,938 )
(9,497 )
Comprehensive Income (Loss)
$
(17,740 )
$
$
(56,285 )
$
See Notes to Condensed Consolidated Financial Statements (unaudited)
7
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Common Stock
Treasury Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Total
Shares
Amount
(Dollars in thousands)
Balance at June 30, 2021
$
$
(20,000 )
$
$
$
$
Net income
-
Other comprehensive loss
-
(6,823 )
(6,823 )
Issuance of shares from equity-based awards
(110 )
(109 )
Stock-based compensation
-
Balance at September 30, 2021
$
$
(20,000 )
$
$
$
$
Common Stock
Treasury Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive Loss
Total
Shares
Amount
(Dollars in thousands)
Balance at June 30, 2022
$
$
(48,501 )
$
$
$
(49,429 )
$
Net income
-
Other comprehensive loss
-
(35,020 )
(35,020 )
Issuance of shares from equity-based awards
Open market common share repurchases
(794,457 )
(10,827 )
(10,827 )
Stock-based compensation
-
Balance September 30, 2022
$
$
(59,328 )
$
$
$
(84,449 )
$
See Notes to Condensed Consolidated Financial Statements (unaudited)
8
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Common Stock
Treasury Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Total
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2020
$
$
(6,061 )
$
$
$
$
Net income
-
Other comprehensive loss
-
(9,497 )
(9,497 )
Issuance of shares from equity-based awards
(608 )
(605 )
Open market common share repurchases
(964,193 )
(13,939 )
(13,939 )
Employee receivables from sale of stock
-
Stock-based compensation
-
Balance at September 30, 2021
$
$
(20,000 )
$
$
$
$
Common Stock
Treasury Stock
Additional
Paid-in Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss)
Total
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2021
$
$
(28,347 )
$
$
$
$
Cumulative effect from changes in accounting
principle
(1)
-
(2,610 )
(2,610 )
Net income
-
Other comprehensive loss
-
(105,938 )
(105,938 )
Issuance of shares from equity-based awards
(631 )
(627 )
Open market common share repurchases
(2,090,782 )
(30,981 )
(30,981 )
Employee receivables from sale of stock
-
Stock-based compensation
Exercise of warrants
Balance September 30, 2022
$
$
(59,328 )
$
$
$
(84,449 )
$
(1)
Measurement of Credit Losses on Financial Instruments. See “Note 1: Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Condensed
Consolidated Financial Statements (unaudited) for more information on the Company’s adoption of this guidance and the impact to the Company’s results of operations.
See Notes to Condensed Consolidated Financial Statements (unaudited)
9
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine Months Ended
September 30,
2022
2021
(Dollars in thousands)
Operating Activities
Net income
$
$
Items not requiring (providing) cash
Depreciation and amortization
Provision for credit losses
(1)
Accretion of discounts and amortization of premiums on securities
Stock based compensation
Foreclosed asset impairment
Deferred income taxes
Net increase in bank owned life insurance
(1,200 )
(3,088 )
Net unrealized losses on equity securities
Net realized (gains) losses on available-for-sale securities
(1,043 )
Changes in
Interest receivable
(4,530 )
Other assets
(1,753 )
Other liabilities
(2,989 )
(541 )
Net cash provided by operating activities
Investing Activities
Net change in loans
(425,494 )
Purchases of available-for-sale securities
(82,305 )
(168,705 )
Proceeds from maturities of available-for-sale securities
Proceeds from sale of available-for-sale securities
Proceeds from the sale of foreclosed assets
Purchase of premises and equipment
(1,878 )
(671 )
Proceeds from the sale of premises and equipment and related insurance claims
Purchase of restricted equity securities
(6,957 )
Proceeds from sale of restricted equity securities
Proceeds from death benefit on bank owned life insurance
Net cash provided by (used in) investing activities
(476,699 )
Financing Activities
Net increase in demand deposits, savings, NOW and money market accounts
Net increase (decrease) in time deposits
(342,361 )
Net decrease in fed funds purchased and repurchase agreements
(2,306 )
Proceeds from Federal Home Loan Bank advances
Repayment of Federal Home Loan Bank advances
(149,000 )
(16,500 )
Net proceeds of Federal Home Loan Bank line of credit
Issuance of common shares, net of issuance cost
Proceeds from employee stock purchase plan
Repurchase of common stock
(30,981 )
(13,939 )
Acquisition of common stock for tax withholding obligations
(995 )
(784 )
Net decrease in employee receivables
Net cash provided by (used in) financing activities
(291,462 )
Decrease in Cash and Cash Equivalents
(173,592 )
(92,088 )
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
$
$
Supplemental Cash Flows Information
Interest paid
$
$
Income taxes paid
$
$
(1)
Notes to Condensed Consolidated Financial Statements
(unaudited)
10
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
CrossFirst Bankshares, Inc. (the “Company”) is a bank holding company whose principal activities are the ownership and
management of its wholly-owned subsidiary, CrossFirst Bank (the “Bank”). In addition, the Bank has
CrossFirst Investments, Inc. (“CFI”) that holds investments in marketable securities, CFBSA I, LLC and CFBSA II, LLC.
The Bank is primarily engaged in providing a full range of banking and financial services 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.
On June 13, 2022, the Company announced its entry into an agreement under which the Bank will acquire Farmers & Stockmens
Bank, the bank subsidiary of Central Bancorp, Inc. (collectively, Farmers & Stockmens Bank and Central Bancorp, Inc. are herein
referred as “Central”), for approximately $
currently expected to close in the fourth quarter of 2022, subject to the satisfaction or waiver of customary closing conditions. Refer to
“Note 16: Subsequent Events” for further information about the acquisition.
Basis of Presentation
The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States
(“GAAP”). The consolidated financial statements include the accounts of the Company, the Bank, CFI, CFBSA I, LLC and CFBSA II,
LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated interim financial statements are unaudited. Certain information and footnote disclosures presented in
accordance with GAAP have been condensed or omitted and should be read in conjunction with the Company’s consolidated financial
statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021
Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2022.
necessary for the fair presentation of the financial position, results of operations, and cash flows of the Company. 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.
Refer to the “accounting pronouncements implemented” below for changes in the accounting policies of the Company. No
significant changes to the Company’s accounting policies, other than those mentioned under “accounting pronouncements implemented”
below, have occurred since December 31, 2021, the most recent date audited financial statements were provided within the Company’s
2021 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, due to the difficult, subjective, or complex judgments and
assumptions inherent in those policies and estimates and the potential sensitivity of the Company’s financial statements to those
judgments and assumptions, are critical to an understanding of the Company’s financial condition and results of operations. Actual
results could differ from those estimates. The allowance for credit losses, deferred tax asset, and fair value of financial instruments are
particularly susceptible to significant change.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11
Cash Equivalents
The Company had $
2022.
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.
Accounting Pronouncements Implemented
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments:
Background
measured at amortized cost, including loans held-for-investment and off-balance sheet credit exposures. The Current Expected
Credit Loss (“CECL”) model requires an estimate of expected credit losses, measured over the contractual life of an instrument,
that considers forecasts of future economic conditions in addition to information about past events and current conditions. ASU
2016-13 requires new disclosures, including the use of vintage analysis on the Company’s credit quality indicators.
In addition, ASU 2016-13 removes the available-for-sale (“AFS”) securities other-than-temporary-impairment model that reduced
the cost basis of the investment and is replaced with an impairment model that will recognize an allowance for credit losses on
available-for-sale securities.
Implementation
selection, implementation, and testing of third-party software.
The Company used a loss-rate ("cohort") method to estimate the expected allowance for credit losses ("ACL") for all loan pools.
The cohort method identifies and captures the balance of a pool of loans with similar risk characteristics, as of a particular point
in time to form a cohort, then tracks the respective losses generated by that cohort of loans over their remaining lives, or until the
loans are “exhausted” (i.e., have reached an acceptable point in time at which a significant majority of all losses are
expected to have been recognized). The cohort method closely aligned with the Company's incurred loss model. This allowed the
Company to take advantages of the efficiencies of processes and procedures already in practice.
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 formulated changes to policies, procedures, disclosures, and internal controls that
were 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. Refer to “Note 4: Loans and Allowance for Credit Losses” for
additional information regarding the policies, procedures, and credit quality indicators used by the Company.
Impact of adoption
disclosures as of and for the three- and nine-month periods ended September 30, 2022 are presented in accordance with ASC 326,
Financial Instruments-Credit Losses. The Company did not recast comparative financial periods and has presented those
disclosures under previously applicable GAAP. Because the Company chose the cohort method, the model must consider net
Notes to Condensed Consolidated Financial Statements
(unaudited)
12
deferred fees and costs. As a result, the Company transferred the previously disclosed unearned fees into the applicable loan
segments.
The Company used the prospective transition approach for AFS securities for which other-than-temporary-impairment has been
recognized prior to January 1, 2022. As a result, the amortized cost basis remains the same before and after the effective date of
ASU 2016-13.
The following table illustrates the impact of adopting ASU 2016-13 and details how outstanding loan balances have been
reclassified because of changes made to the Company’s loan segments under CECL:
January 1, 2022
As Reported under ASU
2016-13
Pre-ASU 2016-13
Impact of ASU 2016-13
Adoption
(Dollars in thousands)
Assets:
Loans (outstanding balance)
Commercial and Industrial
$
$
$
(558,657 )
Commercial and Industrial lines of credit
Energy
(281 )
Commercial real estate
(2,616 )
Construction and land development
(3,906 )
Residential real estate
(240,770 )
Multifamily real estate
PPP
(64,805 )
Consumer
Gross Loans
(13,407 )
Net deferred loan fees and costs
(13,407 )
Allowance for credit losses on loans
(1,747 )
Loans, net of the allowance for credit
losses on loans
Deferred tax asset
$
$
$
(827 )
Liabilities
Allowance for credit losses on off-balance
sheet exposures
$
$
$
Stockholders' equity
Retained earnings
$
$
$
(2,610 )
In connection with adoption of ASU 2016-13, changes were made to the Company’s loan segments to align with the methodology
applied in determining the allowance under CECL. The commercial and industrial loan portfolio was separated into term loans
and lines of credit. In addition, the remaining Paycheck Protection Program (“PPP”) loans were consolidated into the commercial
and industrial term loan segment due to their declining outstanding balance. The Company also separated the residential and
multifamily real estate loan segments. Refer to “Note 4: Loans and Allowance for Credit Losses” for detail on the loan segments.
Accounting Policies:
Notes to Condensed Consolidated Financial Statements
(unaudited)
13
Accrued Interest -
The Company made an accounting policy election to exclude accrued interest from the amortized cost basis of loans. In addition,
the Company elected not to measure an allowance for credit losses for accrued interest receivable, because a timely write-off
policy exists. The policy generally requires loans to be placed on non-accrual when principal or interest is 90 days or more past
due unless the loan is well-secured and in the process of collection. A well-secured loan means that collateral or a guaranty has
sufficient value to pay off the loan in full. When a loan is placed on non-accrual, accrued interest is reversed against interest
income.
The Company made a policy election to exclude accrued interest from the amortized cost basis of AFS securities. AFS securities
are placed on non-accrual status when the Company no longer expects to receive all contractual amounts due, which is generally
at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual
status. Accordingly, the Company did not recognize an allowance for credit loss against accrued interest receivable.
Available-for-sale Securities in an Unrealized Loss Position –
For AFS securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not
that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or
requirement to sell is met, the securities’ amortized cost basis is written down to fair value through income. For AFS securities
that do not meet the criteria above, the Company evaluates whether the decline in fair value has resulted from credit losses or
other factors. Management considers the extent to which fair value is less than amortized cost, any changes to the rating of the
security by a rating agency, and adverse conditions specifically related to the security, among other factors.
If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is
compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the
amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount
that the fair value is less than amortized cost basis.
ASU 2016-02, Leases (Topic 842):
Background
such leases. This represents a change from previous GAAP that did not require operating leases to be recognized on the lessees’
balance sheet. The purpose of Topic 842 is to increase transparency and comparability between organizations that enter into lease
agreements. The update modifies lease disclosure requirements as well.
On the lease commencement date (or on the date of adoption), a lessee is required to measure and record a lease liability equal to
the present value of the remaining lease payments, discounted using an appropriate discount rate. In addition, a right-of-use asset
is recorded that consists of the initial measurement of the lease liability adjusted for certain payments, including lease incentives
received and initial direct costs.
For operating leases, after lease commencement, the lease liability is reported at the present value of the unpaid lease payments
discounted using the discount rate established at lease commencement. The lease expense is calculated by summing all future
lease payments in the lease term and lease incentives not yet recognized. The sum is then amortized on a straight-line basis over
the lease term. The right-of-use asset is amortized as the difference between the straight-line expense and the amortizing lease
liability.
Implementation
properties located in the Kansas City, Missouri; Tulsa, Oklahoma; Dallas, Texas; Frisco, Texas; and Phoenix, Arizona markets.
The remaining lease terms range from two to twenty years with potential renewal terms. The leases include various payment
Notes to Condensed Consolidated Financial Statements
(unaudited)
14
terms including fixed payments with annual increases to variable payments. In addition, several of the leases include lease
incentives.
The discount rates were not readily determinable in the lease agreements. As a result, the Company used the incremental
borrowing rate in accordance with Topic 842. The Company used the Federal Home Loan Bank (“FHLB”) yield curve as the
incremental borrowing rate.
The Company elected several practical expedients that are listed below:
Practical Expedient Elected
Impact to Lease Accounting Implementation
An entity need not reassess whether any expired
or existing contracts are or contain leases.
The Company was not required to re-evaluate previously identified leases,
including embedded leases, that existed as of the adoption date.
An entity need not reassess the lease classification
for an expired or existing leases.
The Company was not required to re-classify previously identified operating
leases that existed as of the adoption date. The Company did not have any
capital leases as of December 31, 2021.
An entity need not reassess initial direct costs for
any existing leases.
The Company was not required to review previously established lease
agreements as of the adoption date for initial direct costs. Initial direct costs
increase the right-of-use asset and do not impact the lease liability.
An entity may combine lease and non-lease
components.
If not elected, the Company would be required to allocate the total
consideration in a lease contract to lease and non-lease components based on
their relative standalone price. The election results in higher right-of-use
assets and lease liabilities.
Short-term lease exemption.
The Company is not required to record a right-of-use asset and lease liability
for a lease whose term is 12 months or less and does not include a purchase
option that the lessee is reasonably certain to exercise.
Impact of Adoption
Company did not recast comparative financial periods and has presented those disclosures under previously applicable GAAP.
The following table illustrates the impact of adopting ASU 2016-02 on the Company’s financial statements:
January 1, 2022
As Reported under ASU
2016-02
Pre-ASU 2016-02
Impact of ASU 2016-02
Adoption
(Dollars in thousands)
Assets:
Right-of-use asset
$
$
$
Liabilities:
Lease incentive
(2,125 )
Accrued rent payable
(904 )
Lease liability
$
$
$
Recent Accounting Pronouncements
ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
Background
gross write-offs. The update eliminates the accounting guidance for TDRs and requires a company to determine if a modification
results in a new loan or a continuation of an existing loan. The update enhances the required disclosures for certain modifications
made to borrowers experiencing financial difficulty.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15
In addition, the update requires disclosure of current-period gross charge -offs by year of origination for financing receivables.
For the Company, the amendments are effective as of January 1, 2023, but early adoption is permitted and would be applied as of
the beginning of the fiscal year of adoption.
Impact of adoption
impact cannot be established.
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,
2022
2021
2022
2021
(Dollars in thousands except per share data)
Earnings per Share
Net income available to common stockholders
$
$
$
$
Weighted average common shares
Earnings per share
$
$
$
$
Diluted Earnings per Share
Net income available to common stockholders
$
$
$
$
Weighted average common shares
Effect of dilutive shares
Weighted average dilutive common shares
Diluted earnings per share
$
$
$
$
Stock-based awards not included because to do so would be
antidilutive
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, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
$
$
$
Collateralized mortgage obligations - GSE residential
State and political subdivisions
Corporate bonds
Total available-for-sale securities
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
16
December 31, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
$
$
$
Collateralized mortgage obligations - GSE residential
State and political subdivisions
Corporate bonds
Total available-for-sale securities
$
$
$
$
As of September 30, 2022, the available-for-sale securities had $
basis.
The amortized cost and fair value of available-for-sale securities at September 30, 2022, by contractual maturity, are shown
below:
September 30, 2022
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
$
-
$
$
$
$
Estimated fair value
$
-
$
$
$
$
Weighted average yield
(2)
-
%
%
%
%
%
Collateralized mortgage obligations -
GSE residential
(1)
Amortized cost
$
-
$
-
$
$
$
Estimated fair value
$
-
$
-
$
$
$
Weighted average yield
(2)
-
%
-
%
%
%
%
State and political subdivisions
Amortized cost
$
$
$
$
$
Estimated fair value
$
$
$
$
$
Weighted average yield
(2)
%
%
%
%
%
Corporate bonds
Amortized cost
$
-
$
$
$
-
$
Estimated fair value
$
-
$
$
$
-
$
Weighted average yield
(2)
-
%
%
%
-
%
%
Total available-for-sale securities
Amortized cost
$
$
$
$
$
Estimated fair value
$
$
$
$
$
Weighted average yield
(2)
%
%
%
%
%
(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 Condensed Consolidated Financial Statements
(unaudited)
17
The following tables show the number of securities, unrealized loss, and fair value of the Company’s investments with unrealized
losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at
September 30, 2022 and December 31, 2021:
September 30, 2022
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
$
$
$
$
$
$
Collateralized
mortgage obligations
- GSE residential
State and political
subdivisions
Corporate bonds
Total temporarily
impaired securities
$
$
$
$
$
$
December 31, 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
$
$
$
$
$
$
Collateralized
mortgage obligations
- GSE residential
State and political
subdivisions
Corporate bonds
Total temporarily
impaired securities
$
$
$
$
$
$
Based on the Company’s evaluation at September 30, 2022, under the new impairment model, an allowance for credit losses has
t been recorded
r have unrealized losses been recognized into income. The issuers of the securities are of high credit quality and
have a long history of no credit losses; management does not intend to sell, and it is likely that management will not be required to sell
the securities prior to their anticipated recovery; and the decline in fair value is largely attributed to changes in interest rates and other
market conditions. The issuers continue to make timely principal and interest payments.
Notes to Condensed Consolidated Financial Statements
(unaudited)
18
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, 2022
September 30, 2022
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
(Dollars in thousands)
Available-for-sale securities
$
$
(5 )
$
(4 )
$
$
(46 )
$
(43 )
For the Three Months Ended
For the Nine Months Ended
September 30, 2021
September 30, 2021
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
(Dollars in thousands)
Available-for-sale securities
$
$
(79 )
$
$
$
(108 )
$
Equity Securities
Equity securities consist of a $
three private equity funds. Equity securities are included in “other assets” on the Consolidated Balance Sheets.
The Company elected a measurement alternative for the three private equity funds that allows the securities 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. No such events
occurred during the three or nine-month periods ended September 30, 2022.
The following is a summary of the unrealized and realized gains and losses on equity securities recognized in net income:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
Net gains (losses) recognized during the reporting period on equity securities
$
(87 )
$
(6,210 )
$
(261 )
$
(6,243 )
Less: net gains recognized during the reporting period on equity securities sold
during the reporting period
Unrealized gains (losses) recognized during the reporting period on equity
securities still held at the reporting date
$
(87 )
$
(6,210 )
$
(261 )
$
(6,243 )
Notes to Condensed Consolidated Financial Statements
(unaudited)
19
Note 4: Loans and Allowance for Credit Losses
Loan Portfolio Segments
Categories of loans at September 30, 2022 and December 31, 2021 include:
September 30, 2022
December 31, 2021
(Dollars in thousands)
Commercial and industrial
$
$
Commercial and industrial lines of credit
Energy
Commercial real estate
Construction and land development
Residential real estate
Multifamily real estate
Consumer
Loans, net of unearned fees
Less: allowance for credit losses
(1)
Loans, net
$
$
(1)
Operations and Summary of Significant Accounting Policies.”
Accrued interest of $
assets” on the Consolidated Balance Sheets is excluded from the amortized cost basis disclosed in the above table.
The Company aggregates the loan portfolio by similar credit risk characteristics. The loan segments are described in additional
detail below:
●
Commercial and Industrial
plant, and equipment purchases and expansions. Loan terms typically require principal and interest payments that
decrease the outstanding loan balance. 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.
The category also includes the remaining PPP loans outstanding. These loans were established by the Coronavirus Aid,
Relief, and Economic Security Act which authorized forgivable loans to small businesses to pay their employees during
the COVID-19 pandemic. The loans are
repayment is primarily dependent on the borrower’s cash flow or SBA repayment approval.
●
Commercial and Industrial Lines of Credit
– The category includes lines of credit to commercial and industrial
customers for working capital needs. The loan terms typically require interest-only payments, mature in one year, and
require the full balance paid-off at maturity. Lines of credit allow the borrower to drawdown and repay the line of credit
based on the customer’s cash flow needs. Repayment is primarily from the operating cash flow of the business. Credit
risk is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from
business operations.
●
Energy
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.
Notes to Condensed Consolidated Financial Statements
(unaudited)
20
●
Commercial Real Estate
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
estimated value of the completed project and include independent appraisal reviews and a financial analysis of the
developers and property owners. Sources of repayment include permanent loans, sales of developed property or an
interim loan commitment from the Company until permanent financing is obtained. These loans are higher risk than
other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic
conditions, and the availability of long-term financing. Credit risk may be impacted by the creditworthiness of a
borrower, property values and the local economies in the borrower’s market areas.
●
Residential Real Estate
- The category includes loans that are generally secured by owner-occupied 1-4 family
residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers.
Credit risk in these loans can be impacted by economic conditions within or outside the borrower’s market areas that
might impact either property values or a borrower’s personal income.
●
Multifamily Real Estate -
The category includes loans that are generally secured by multifamily properties. Repayment
of these loans is primarily dependent on occupancy rates and the personal income of the 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 or the tenants’ personal income.
●
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.
Allowance for Credit Losses
The Company established a CECL committee that meets at least quarterly to oversee the ACL methodology. The committee
estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. The ACL represents the Company’s current estimate of lifetime credit losses inherent in the
loan portfolio at the balance sheet date. The ACL is adjusted for expected prepayments when appropriate and excludes expected
extensions, renewals, and modifications.
The ACL is the sum of three components: (i) asset specific / individual loan reserves; (ii) quantitative (formulaic or pooled)
reserves; and (iii) qualitative (judgmental) reserves.
Asset Specific -
individually evaluated. Individual reserves are calculated for loans that are risk-rated substandard and on non-accrual and loans that are
risk-rated doubtful or loss that are greater than a defined dollar threshold. In addition, TDRs are also individually evaluated. Reserves on
asset specific loans may be based on collateral, for collateral-dependent loans, or on quantitative and qualitative factors, including
expected cash flow, market sentiment, and guarantor support.
Quantitative
- The Company used the cohort method, which identifies and captures the balance of a pool of loans with similar
risk characteristics as of a particular time to form a cohort. For example, the outstanding commercial and industrial loans and
commercial and industrial lines of credit loan segments as of quarter -end are considered cohorts. The cohort is then tracked for losses
over the remaining life of loans or until the pool is exhausted. The Company used a lookback period of approximately six-years to
establish the cohort population. By using the historical data timeframe, the Company can establish a historical loss factor for each of its
loan segments and adjust the losses with qualitative and forecast factors.
Notes to Condensed Consolidated Financial Statements
(unaudited)
21
Qualitative
primarily uses the following qualitative factors:
◾
The nature and volume of changes in risk ratings;
◾
The volume and severity of past due loans;
◾
The volume of non-accrual loans;
◾
The nature and volume of the loan portfolio, including the existence, growth, and effect of any concentrations of credit;
◾
Changes in the Institute of Supply Management’s Purchasing Manager Indices (“PMI”) for services and manufacturing;
◾
Changes in collateral values;
◾
Changes in lending policies, procedures, and quality of loan reviews;
◾
Changes in lending staff; and
◾
Changes in competition, legal and regulatory environments
In addition to the current condition qualitative adjustments, the Company uses the Federal Reserve’s unemployment forecast to
adjust the ACL based on forward looking guidance. The Federal Reserve’s unemployment forecast extends three-years and is eventually
reverted to the mean of six percent by year 10.
Drivers of Change in the ACL
The ACL increased by less than $
$
of $
driven by $
increase of $
Credit Quality Indicators
Internal Credit Risk Ratings
The Company uses a weighted average risk rating factor to adjust the historical loss factors for current events. Risk ratings
incorporate the criteria utilized by regulatory authorities to describe criticized assets, but separate various levels of risk concentrated
within the regulatory “Pass” category. Risk ratings are established for loans at origination and are monitored on an ongoing basis. The
rating assigned to a loan reflects the risks posed by the borrower’s expected performance and the transaction’s structure. Performance
metrics used to determine a risk rating include, but are not limited to, cash flow adequacy, liquidity, and collateral. A description of the
loan risk ratings follows:
Loan Grades
●
Pass (risk rating 1-4)
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)
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)
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
Notes to Condensed Consolidated Financial Statements
(unaudited)
22
individual assets classified substandard. Substandard loans include both performing and non-performing 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 Condensed Consolidated Financial Statements (unaudited)
23
The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating categories and loan segments:
As of September 30, 2022
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Commercial and industrial
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Commercial and industrial lines of credit
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Energy
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
24
As of September 30, 2022
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Commercial real estate
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Construction and land development
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Residential real estate
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
25
As of September 30, 2022
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Multifamily real estate
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Consumer
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Total
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
26
Loan Portfolio Aging Analysis
The following tables present the Company’s loan portfolio aging analysis as of September 30, 2022:
As of September 30, 2022
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Commercial and industrial
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Commercial and industrial lines of credit
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Energy
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
27
As of September 30, 2022
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Commercial real estate
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Construction and land development
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Residential real estate
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
28
As of September 30, 2022
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Multifamily real estate
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Consumer
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Total
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
29
Non-accrual Loan Analysis
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. 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 segments:
As of September 30, 2022
Amortized Cost Basis by Origination Year and On Non-accrual
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted
to term
loans
Total Non-
accrual
Loans
Non-accrual
Loans with no
related
Allowance
(Dollars in thousands)
Commercial and industrial
$
$
$
$
$
$
$
$
$
$
Commercial and industrial
lines of credit
Energy
Commercial real estate
Construction and land
development
Residential real estate
Multifamily real estate
Consumer
Total
$
$
$
$
$
$
$
$
$
$
Interest income recognized on non-accrual loans was $
Notes to Condensed Consolidated Financial Statements (unaudited)
30
Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses and allowance for credit losses on off-balance sheet credit exposures by portfolio segment for the
three-month period ended September 30, 2022:
For the Three Months Ended September 30, 2022
Commercial
and Industrial
Commercial
and
Industrial
Lines of
Credit
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
Real Estate
Multifamily
Real Estate
Consumer
Total
(Dollars in thousands)
Allowance for Credit Losses:
Beginning balance
$
$
$
$
$
$
$
$
$
Charge-offs
(2,000 )
(642 )
(2,642 )
Recoveries
Provision (credit)
(958 )
(1,335 )
Ending balance
$
$
$
$
$
$
$
$
$
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:
Beginning balance
$
$
$
$
$
$
$
$
$
Provision (credit)
(2 )
(25 )
Ending balance
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
31
For the Nine Months Ended September 30, 2022
Commercial and
Industrial
(1)
Commercial
and
Industrial
Lines of
Credit
(1)
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
Real
Estate
(2)
Multifamily
Real
Estate
(2)
Consumer
Total
(Dollars in thousands)
Allowance for Credit Losses:
Beginning balance, prior to
adoption of ASU 2016-13
$
$
$
$
$
$
$
$
$
Impact of ASU 2016-13
adoption
(10,213 )
(39 )
(186 )
(83 )
(2,552 )
(5 )
(1,747 )
Charge-offs
(790 )
(3,971 )
(4,609 )
(1,102 )
(217 )
(13 )
(10,702 )
Recoveries
Provision (credit)
(1,507 )
(3,709 )
Ending balance
$
$
$
$
$
$
$
$
$
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:
Beginning balance, prior to
adoption of ASU 2016-13
$
$
$
$
$
$
$
$
$
Impact of ASU 2016-13
adoption
Provision (credit)
(10 )
(44 )
(35 )
(3 )
(53 )
Ending balance
$
$
$
$
$
$
$
$
$
(1)
segment.
(2)
segment.
Notes to Condensed Consolidated Financial Statements
(unaudited)
32
Collateral Dependent Loans:
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or
sale of the collateral and the borrower is experiencing financial difficulty. The following table presents the amortized cost balance of
loans considered collateral dependent by loan segment and collateral type as of September 30, 2022:
As of September 30, 2022
Loan Segment and Collateral Description
Amortized Cost of
Collateral Dependent
Loans
Related Allowance for
Credit Losses
Amortized Cost of
Collateral Dependent
Loans with no related
Allowance
(Dollars in thousands)
Commercial and Industrial
All business assets
$
$
$
Commercial and Industrial Lines of Credit
All business assets
Energy
Oil and natural gas properties
Commercial Real Estate
Commercial real estate properties
$
$
$
Troubled Debt Restructurings
TDRs 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 nine-month periods ended September 30, 2022 and 2021,
outstanding balance of TDRs was $
Notes to Condensed Consolidated Financial Statements
(unaudited)
33
Disclosures under Previously Applicable GAAP
The following disclosures are presented under previously applicable GAAP. The description of the general characteristics of the
loan rating categories is as described above. The following table presents the credit risk profile of the Company’s loan portfolio based on
an internal rating category and portfolio segment as of December 31, 2021:
As of December 31, 2021
Pass
Special
Mention
Substandard
Performing
Substandard
Non-
performing
Doubtful
Loss
Total
(Dollars in thousands)
Commercial and
industrial
$
$
$
$
$
$
$
Energy
Commercial real
estate
Construction and
land development
Residential and
multifamily real
estate
PPP
Consumer
$
$
$
$
$
$
$
The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31,
2021:
As of December 31, 2021
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)
Commercial and industrial
$
$
$
$
$
$
$
Energy
Commercial real estate
Construction and land
development
Residential and multifamily
real estate
PPP
Consumer
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
34
The following table presents the Company’s loans on non-accrual as of December 31, 2021:
December 31, 2021
(Dollars in thousands)
Commercial and industrial
$
Energy
Commercial real estate
Construction and land development
Residential and multifamily real estate
PPP
Consumer
Total non-accrual loans
$
The following table presents the allowance for loan losses by portfolio segment and disaggregated based on the Company’s
impairment methodology:
As of December 31, 2021
Commercial
and
Industrial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Period end allowance for loan losses allocated to:
Individually
evaluated for
impairment
$
$
$
$
$
$
$
$
Collectively
evaluated for
impairment
Ending
balance
$
$
$
$
$
$
$
$
Allocated to loans:
Individually
evaluated for
impairment
$
$
$
$
$
$
$
$
Collectively
evaluated for
impairment
Ending
balance
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
35
A loan is considered impaired 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 non-performing loans
but also include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. The
intent of concessions is to maximize collection. The following table presents loans individually evaluated for impairment:
As of December 31, 2021
Recorded Balance
Unpaid Principal Balance
Specific Allowance
(Dollars in thousands)
Commercial and industrial
$
$
$
-
-
Commercial real estate
-
-
Residential and multifamily real estate
-
-
Consumer
-
Commercial and industrial
Commercial real estate
Residential and multifamily real estate
-
Consumer
Commercial and industrial
Commercial real estate
Residential and multifamily real estate
Consumer
$
$
$
Total interest income recognized during the three and nine-month periods ended September 30, 2021 for impaired loans was $
million and $
2021 was $
Notes to Condensed Consolidated Financial Statements
(unaudited)
36
The following table presents the activity in the allowance for loan losses by portfolio segment for the three- and nine-month
periods ended September 30, 2021:
Three Months Ended September 30, 2021
Commercial
and
Industrial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Allowance for loan losses:
Beginning
balance
$
$
$
$
$
$
$
$
Provision
(3,666 )
(4,798 )
(236 )
(694 )
(561 )
(45 )
(10,000 )
Charge-offs
(1,071 )
(503 )
(1 )
(1,575 )
Recoveries
Ending balance
$
$
$
$
$
$
$
$
Nine Months Ended September 30, 2021
Commercial
and
Industrial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Allowance for loan losses:
Beginning
balance
$
$
$
$
$
$
$
$
Provision
(5,290 )
(3,409 )
(421 )
(577 )
(184 )
Charge-offs
(11,903 )
(503 )
(1 )
(12,407 )
Recoveries
Ending balance
$
$
$
$
$
$
$
$
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses for off-balance sheet credit exposures unless the obligation is unconditionally
cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The
estimate is calculated for each loan segment and includes consideration of the likelihood that funding will occur and an estimate of the
expected credit losses on commitments expected to be funded over its estimated life. For each pool of contractual obligations expected
to be funded, the Company uses the reserve rate established for the related loan pools. The $7 million allowance for credit losses on off
balance sheet credit exposures at September 30, 2022 is included in “interest payable and other liabilities” on the balance sheet.
The following categories of off-balance sheet credit exposures have been identified:
Loan commitments – include revolving lines of credit, non-revolving lines of credit, and loans approved that are not yet funded.
Risks inherent to revolving lines of credit often are related to the susceptibility of an individual or business experiencing
unpredictable cash flow or financial troubles, thus leading to payment default. The primary risk associated with non-revolving
lines of credit is the diversion of funds for other expenditures.
Letters of credit – are primarily established to provide assurance to the beneficiary that the applicant will perform certain
obligations arising out of a separate transaction between the beneficiary and applicant. If the obligation is not met, it gives the
beneficiary the right to draw on the letter of credit.
Notes to Condensed Consolidated Financial Statements
(unaudited)
37
Note 5: Derivatives and Hedging
The Company is exposed to certain risks arising from both its business operations and economic conditions, including interest
rate, liquidity, and credit risk. The Company uses derivative financial instruments as part of its risk management activities to manage
exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value
of which are determined by interest rates.
Cash Flow Hedges of Interest Rate Risk
The Company uses interest rate derivatives to add stability to interest income and expense and to manage its exposure to interest
rate movements. To accomplish this objective, the Company uses interest rate swaps and collars as part of its interest rate risk
management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in
exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional
amount. Interest rate collars designated as cash flow hedges involve payments of variable-rate amounts if interest rates rise above the
cap strike rate on the contract and the receipt of variable-rate amounts if interest rates fall below the floor strike rate on the contract.
During 2022, such derivatives were used to hedge the variable cash flows associated with existing variable-rate loan assets. The five
swaps that were entered into in 2021 were terminated during the third quarter of 2022, however, the amortization of the gains on these
instruments will start in 2023 based on the original effective dates of these swaps. The Company also entered into a new interest rate
collar during the third quarter of 2022. Derivatives designated and that qualify as cash flow hedges include
notional amount of $
December 31, 2021.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded
in Accumulated Other Comprehensive Income (Loss) (“AOCI”) and subsequently reclassified into interest income or expense in the
same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be
reclassified to interest income and expense as interest payments are received and made on the Company’s variable-rate assets and
liabilities. The derivative financial instruments did not impact the Condensed Consolidated Statements of Income for the three- and
nine-month periods ended September 30, 2022. The Company estimates that less than $
interest expense during the next twelve months.
The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service provided 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. Interest rate derivatives associated with this program do not meet the strict hedge accounting
requirements and changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in
earnings.
Swap fees earned upon origination and credit valuation adjustments that represent the risk of a counterparty’s default are reported
on the Consolidated Statements of Income as swap fee income, net. The effect of the Company’s derivative financial instruments gain
(loss) is reported on the Consolidated Statements of Cash Flows within “other assets” and “other liabilities”.
These
31, 2021, respectively.
Notes to Condensed Consolidated Financial Statements
(unaudited)
38
Fair Values of Derivative Instruments on the Consolidated Balance Sheets
The table below presents the fair value of the Company’s derivative financial instruments and their classification on the
Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021:
Asset Derivatives
Liability Derivatives
Balance Sheet
September 30,
December 31,
Balance Sheet
September 30,
December 31,
Location
2022
2021
Location
2022
2021
(Dollars in thousands)
Interest rate products:
Derivatives not
designated as hedging
instruments
Interest
receivable and
Other assets
$
$
Interest payable
and other
liabilities
$
$
Derivatives
designated as hedging
instruments
Other assets
Interest payable
and other
liabilities
Total
$
$
$
$
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income (Loss) for the
three- and nine-months ended September 30, 2022. The Company had no cash flow hedges for the nine-months ended September 30,
2021.
For the Three Months Ended
For the Nine Months Ended
September 30, 2022
September 30, 2022
Location of
Gain or (Loss)
Recognized
from
Accumulated
Other
Comprehensive
Income into
Income
Gain or
(Loss)
Recognized
in OCI on
Derivative
Gain or
(Loss)
Recognized
in OCI
Included
Component
Gain or
(Loss)
Recognized
in OCI
Excluded
Component
Gain or
(Loss)
Recognized
in OCI on
Derivative
Gain or
(Loss)
Recognized
in OCI
Included
Component
Gain or
(Loss)
Recognized
in OCI
Excluded
Component
(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
$
(6,891 )
$
(6,891 )
$
$
(6,891 )
$
(6,891 )
$
Interest Rate Products
(185 )
(185 )
$
$
(7,076 )
$
(7,076 )
$
$
(3,036 )
$
(3,036 )
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
39
Note 6: Time Deposits and Borrowings
The scheduled maturities, excluding interest, of the Company’s borrowings at September 30, 2022 were as follows:
September 30, 2022
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
$
$
$
$
$
$
$
FHLB borrowings
FHLB line of credit
Trust preferred securities
(1)
$
$
$
$
$
$
$
(1)
The contract value of the trust preferred securities is $
Note 7: Change in Accumulated Other Comprehensive (Loss) Income
Amounts reclassified from AOCI and the affected line items in the Condensed Consolidated Statements of Income during the
three- and nine-month periods ended September 30, 2022 and 2021, were as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Affected Line Item in the
2022
2021
2022
2021
Statements of Income
(Dollars in thousands)
Unrealized gains (losses) on available-for-sale
securities
$
(4 )
$
$
(43 )
$
Gain (loss) on sale of available-
for-sale securities
Less: tax benefit effect
(1 )
(11 )
Income tax expense (benefit)
Net reclassified amount
$
(3 )
$
$
(32 )
$
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, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject.
The capital rules require the Company to maintain a
% 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.
The Company and the Bank opted to exclude AOCI from the regulatory capital calculations. As a result, change in AOCI,
including the recent decrease in the available-for-sale securities portfolio, net of tax, did not impact the Company’s or Bank’s regulatory
capital ratios.
Notes to Condensed Consolidated Financial Statements
(unaudited)
40
The Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2022 and December 31, 2021 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, 2022
Total Capital to Risk-Weighted Assets
Consolidated
$
%
$
%
N/A
Bank
$
%
Tier I Capital to Risk-Weighted Assets
Consolidated
N/A
N/A
Bank
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
N/A
Bank
Tier I Capital to Average Assets
Consolidated
N/A
N/A
Bank
$
%
$
%
$
%
December 31, 2021
Total Capital to Risk-Weighted Assets
Consolidated
$
%
$
%
N/A
N/A
Bank
$
%
Tier I Capital to Risk-Weighted Assets
Consolidated
N/A
Bank
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
N/A
N/A
Bank
Tier I Capital to Average Assets
Consolidated
N/A
Bank
$
%
$
%
$
%
Note 9: Stock-Based Compensation
The Company issues stock-based compensation in the form of non-vested restricted stock, restricted stock units and stock
appreciation rights under the 2018 Omnibus Equity Incentive Plan (as amended, the “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
September 30, 2022.
Notes to Condensed Consolidated Financial Statements
(unaudited)
41
The table below summarizes the stock-based compensation for the three- and nine-month periods ended September 30, 2022 and
2021:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
Stock appreciation rights
$
$
$
$
Performance-based stock awards
Restricted stock units and awards
Employee stock purchase plan
Total stock-based compensation
$
$
$
$
Performance-Based Restricted Stock Units
The Company awards performance-based restricted stock units (“PBRSUs”) to key officers of the Company. The performance-
based shares typically cliff-vest at the end of
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
%
of target and
% of target.
During the nine-month period ended September 30, 2022, the Company granted
include
The following table summarizes the status of and changes in the performance -based awards:
Performance-Based Restricted
Stock Unit Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2022
$
Granted
Vested
Forfeited
(24,944 )
Unvested, September 30, 2022
$
Unrecognized stock-based compensation related to the performance awards issued through September 30, 2022 was $
and is expected to be recognized over
Restricted Stock Units and Restricted Stock Awards
The Company issues time-based restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) to provide incentives to
key officers, employees, and non-employee 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
.
Notes to Condensed Consolidated Financial Statements
(unaudited)
42
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, 2022
$
Granted
Vested
(197,536 )
Forfeited
(35,612 )
Unvested, September 30, 2022
$
Unrecognized stock-based compensation related to the RSUs and RSAs issued through September 30, 2022 was $
expected to be recognized over
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,
2022
2021
2022
2021
(Dollars in thousands)
Computed at the statutory rate (
%)
$
$
$
$
Increase (decrease) resulting from
Tax-exempt income
(903 )
(828 )
(2,647 )
(2,830 )
Non-deductible expenses
State income taxes
Equity based compensation
(47 )
(40 )
(201 )
(157 )
Other adjustments
(7 )
(37 )
(34 )
(110 )
Actual tax expense
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
43
The tax effects of temporary differences related to deferred taxes located in “other assets” on the Condensed Consolidated
Balance Sheets are presented below:
September 30, 2022
December 31, 2021
(Dollars in thousands)
Deferred tax assets
Net unrealized loss on securities available-for-sale
$
$
Allowance for credit losses
Lease incentive
Loan fees
Accrued expenses
Deferred compensation
State tax credit
Other
Total deferred tax asset
Deferred tax liability
Net unrealized gain on securities available-for-sale
(6,967 )
FHLB stock basis
(735 )
(757 )
Premises and equipment
(2,209 )
(2,602 )
Other
(1,410 )
(1,229 )
Total deferred tax liability
(4,354 )
(11,555 )
Net deferred tax asset
$
$
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
Level 2
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
Notes to Condensed Consolidated Financial Statements
(unaudited)
44
Recurring Measurements
The following list presents the assets and liabilities recognized in the accompanying Condensed 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, 2022 and December 31, 2021:
Fair Value Description
Valuation
Hierarchy
Level
Where Fair
Value Balance
Can Be Found
Available-for-
Sale Securities and
CRA Equity Security
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
Non-recurring Measurements
The following tables present assets measured at fair value on a non-recurring basis and the level within the fair value hierarchy in
which the fair value measurements fall at September 30, 2022 and December 31, 2021:
September 30, 2022
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 loans
$
$
$
$
Foreclosed assets held-for-sale
$
$
$
$
December 31, 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
$
$
$
$
Foreclosed assets held-for-sale
$
$
$
$
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a non-recurring
basis and recognized in the accompanying Condensed Consolidated Balance Sheets.
Collateral-Dependent Loans, Net of ACL
The estimated fair value of collateral-dependent loans is based on the appraised fair value of the collateral, less estimated cost to
sell. If the fair value of the collateral is below the loan’s amortized cost, the ACL is netted against the loan balance. Collateral-dependent
loans are classified within Level 3 of the fair value hierarchy.
Notes to Condensed Consolidated Financial Statements
(unaudited)
45
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 management. 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.
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 non-recurring Level 3 fair value
measurements at September 30, 2022 and December 31, 2021:
September 30, 2022
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
%
-
%
Collateral dependent loans
(
)%
$
Market comparable
properties
Marketability
discount
Foreclosed assets held-for-sale
(
)%
December 31, 2021
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
%
-
%
Collateral-dependent impaired loans
(
)%
$
Market comparable
properties
Marketability
discount
Foreclosed assets held-for-sale
(
)%
Notes to Condensed Consolidated Financial Statements
(unaudited)
46
The following tables present the estimated fair values of the Company’s financial instruments at September 30, 2022 and
December 31, 2021:
September 30, 2022
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
$
$
$
Available-for-sale securities
Loans, net of allowance for credit losses
Restricted equity securities
Interest receivable
Equity securities
Derivative assets
$
$
$
$
Financial Liabilities
Deposits
$
$
$
$
Federal Home Loan Bank line of credit
Federal Home Loan Bank advances
Other borrowings
Interest payable
Derivative liabilities
$
$
$
$
December 31, 2021
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
$
$
$
Available-for-sale securities
Loans, net of allowance for loan losses
Restricted equity securities
Interest receivable
Equity securities
Derivative assets
$
$
$
$
Financial Liabilities
Deposits
$
$
$
$
Federal Home Loan Bank advances
Other borrowings
Interest payable
Derivative liabilities
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
47
Note 12: Commitments and Credit Risk
Commitments
The Company had the following commitments at September 30, 2022 and December 31, 2021:
September 30, 2022
December 31, 2021
(Dollars in thousands)
Commitments to originate loans
$
$
Standby letters of credit
Lines of credit
Future lease commitments
Commitments related to investment fund
$
$
Note 13: Legal and Regulatory Proceedings
We accrue estimates for resolution of any legal and other contingencies when losses are probable and reasonably estimable in
accordance with ASC 450,
Contingencies
status of each significant matter underlying a legal proceeding or claim and assess our potential financial exposure. The Company
establishes reserves for litigation-related matters when it is probable that a loss associated with a claim or proceeding has been incurred
and the amount of the loss can be reasonably estimated. If the assessment indicates that a potentially material loss contingency is not
probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies considered remote are
generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. Significant
judgment is required in both the determination of probability and the determination as to whether the amount of an exposure is
reasonably estimable, and accruals are based only on the information available to our management at the time the judgment is made,
which may prove to be incomplete or inaccurate or unanticipated events and circumstances may occur that might cause us to change
those estimates and assumptions. Furthermore, the outcome of legal proceedings is inherently uncertain, and we may incur substantial
defense costs and expenses defending any of these matters. Should any one or a combination of more than one of these proceedings be
successful, or should we determine to settle any one or a combination of these matters, we may be required to pay substantial sums,
become subject to the entry of an injunction or be forced to change the manner in which we operate our business, which could have a
material adverse impact on our business, results of operations, cash flows or financial condition.
The Company is subject to various legal proceedings and claims that arise primarily in the ordinary course of business. At this
time, we do not believe the range of potential losses will have a material adverse effect on the consolidated financial position, results of
operations and cash flows of the Company.
Note 14: Leases
The Company’s leases primarily include bank branches located in Kansas City, Missouri; Tulsa, Oklahoma; Dallas, Texas; Frisco,
Texas; and Phoenix, Arizona. The remaining lease terms on these branch leases range from less than
certain options to renew. Renewal terms can extend the lease term between
. The exercise of lease renewal
options is at the Company’s sole discretion. When it is reasonably certain that the Company will exercise its option to renew or extend
the lease term, that option is included in the estimated value of the right of use (“ROU”) asset and lease liability. The Company’s lease
agreements do not contain any material residual value guarantees or material restrictive covenants. As of September 30, 2022, the
Company recognized one finance lease and the remaining Company leases are classified as operating leases.
Notes to Condensed Consolidated Financial Statements
(unaudited)
48
Under ASC 842, a modified retrospective transition approach is required, applying the new standard to all leases existing at the
date of initial application. The Company chose to use the adoption date of January 1, 2022, for ASC 842. As such, all periods presented
after January 1, 2022, are under ASC 842 whereas periods presented prior to January 1, 2022, are in accordance with prior lease
accounting of ASC 840. Financial information was not updated, and the disclosures required under ASC 842 were not provided for dates
and periods before January 1, 2022.
The Company’s right to use an asset over the life of a lease is recorded as an ROU asset, is included in “Other assets” on the
Condensed Consolidated Balance Sheets and was $
required for items such as initial direct costs paid or incentives received. The lease liability is located in “Interest payable and other
liabilities” on the Condensed Consolidated Balance Sheets of $
The Company was unable to determine the implicit rate in the leases and used the incremental borrowing rate instead. The
Company used the FHLB yield curve on the lease commencement date and selected the rate closest to the remaining lease term. The
remaining weighted-average lease term is
% as of September 30, 2022.
The following table presents components of operating lease expense in the accompanying Condensed Consolidated Statements of
Income for the three- and nine-month periods ended September 30, 2022:
For the Three Months Ended
September 30, 2022
For the Nine Months Ended
September 30, 2022
(Dollars in thousands)
Finance lease amortization of right-of-use asset
$
$
Finance lease interest on lease liability
Operating lease expense
Variable lease expense
Short-term lease expense
Total lease expense
$
$
Future minimum commitments due under these lease agreements as of September 30, 2022 are as follows:
Operating Leases
Finance Lease
(Dollars in thousands)
Remainder of 2022
$
$
2023
2024
2025
2026
Thereafter
Total lease payments
$
$
Less imputed interest
Total
$
$
Supplemental cash flow information –
Operating cash flows paid for operating lease amounts included in the measurement of
lease liabilities was $
cash flows paid for finance lease amounts included in the measurement of lease liabilities was $
three- and nine-month periods ended September 30, 2022, respectively. During the three- and nine-months ended September 30 2022,
the Company did
t record any ROU assets that were exchanged for operating lease liabilities.
Notes to Condensed Consolidated Financial Statements
(unaudited)
49
Note 15: Stock Warrants
During the nine-month period ended September 30, 2022,
The Company had
share as of September 30, 2022 and December 31, 2021, respectively. The
Note 16: Subsequent Events
On November 7, 2022, the Company announced its receipt of regulatory approval from the Federal Deposit Insurance
Corporation to complete the previously announced acquisition of Central Bancorp, Inc.’s (“Central”) bank subsidiary, Farmers &
Stockmens Bank (“F&S Bank”). The Company and Central expect to complete the merger during the fourth quarter of 2022 pending
satisfaction or waiver of customary closing conditions set forth in the agreement.
50
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, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022 (the
“2021 Form 10-K”). Results of operations for the three- and nine-month periods ended September 30, 2022 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.
Third Quarter 2022 Highlights
During the third quarter ended September 30, 2022, we accomplished the following:
•
$5.8 billion of assets with 5% operating revenue
(1)
•
$149 million or 3.3% of total loan growth from the previous quarter and $445 million or 10.5% loan growth from the same
quarter last year;
•
Continued improvement in credit quality during the third quarter of 2022 as evidenced by the decrease in non-performing
assets to total assets ratio from 0.92% at September 30, 2021 to 0.31% at September 30, 2022;
•
Return on Average Assets of 1.19% and a Return on Equity of 11.18% for the quarter ended September 30, 2022; and
•
Net Interest Margin (Fully Tax-Equivalent)
(2)
same quarter last year.
(1)
Net interest income plus non-interest income
(2)
The Company modified the yield calculation. Refer to the section “Update to Net Interest Margin Methodology” below for additional information.
Acquisition Update
As previously disclosed, during the second quarter of 2022 the Company entered into an agreement to acquire Farmers &
Stockmens Bank for approximately $75 million, subject to the satisfaction or waiver of customary closing conditions. The Company
believes the acquisition will advance its expansion strategy with access to Colorado and New Mexico while deploying a portion of the
Bank’s capital. The Company believes that the acquisition will increase core deposits and enhance the Company’s SBA lending and
mortgage operations. The Company anticipates the acquisition will close during the fourth quarter of 2022 with system integration
occurring in 2023. Refer to “Note 16: Subsequent Events” within the Notes to Condensed Consolidated Financial Statements
(unaudited) for further information about the acquisition.
Interest Rate Risk Management
The Company is monitoring interest rate sensitivity closely as $3.6 billion or 62% of earning assets mature or reprice within the
twelve-month period following September 30, 2022, including $2.8 billion that reprices in the first month. $3.8 billion of interest-
bearing liabilities mature or reprice over the same twelve-month period. The Company is reviewing additional options to manage
balance sheet sensitivity in the event interest rates decline in early 2024.
Credit Quality
Credit quality metrics generally improved during the third quarter of 2022. Classified loans decreased $8 million from the prior
quarter to $72 million at September 30, 2022. Non-performing assets declined from $31 million at June 30, 2022 to $18 million at
September 30, 2022. Net charge-offs for the three-month period ended September 30, 2022 were $2 million, or 0.16% of average loans.
The Company continues to monitor the U.S. economic indicators, including the inflation rate, commodity prices, interest rates,
and potential supply chain disruptions and the impact it may have on the Company’s markets, clients, and prospects. The Company is
monitoring the impact of a rising interest rate environment on the commercial real estate market and enterprise and leverage loans that is
51
currently mitigated by low debt-to-equity ratios. As of September 30, 2022, the Company did not identify any systemic issues within its
loan portfolio that would significantly affect the credit quality of the loan portfolio.
Update to Net Interest Margin Methodology
The Company modified the yield calculation on the available-for-sale security portfolio to better conform to peer disclosures in
the first quarter of 2022. All earning-asset yields and net interest margins presented were retroactively updated for the change in
methodology. The following changes were made:
◾
The average unrealized gain (loss) on available-for-sale securities balance was removed from the security lines and placed in
other non-interest earning assets.
◾
The annualization method was changed from Actual/Actual to 30/360 for the security yields.
The Company believes the new calculation provides better insight into why the security yields and net interest margin changed
period-to-period.
Impact to Yield
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
Lines Impacted
2022
2022
2022
2021
2021
2022
2021
Previous calculation
Yield on securities - taxable
2.50
%
2.77
%
2.20
%
2.11
%
1.96
%
2.41
%
1.87
%
Yield on securities - tax-exempt
(1)
3.64
3.46
3.31
3.17
3.20
3.51
3.32
Total securities yield
(1)
3.33
3.29
3.00
2.89
2.87
3.20
2.90
Yield on interest-earning assets
(1)
4.73
4.01
3.64
3.70
3.62
4.14
3.56
Net interest spread
(1)
3.50
3.51
3.25
3.22
3.16
3.42
3.06
Net interest margin
(1)
3.60
3.55
3.29
3.28
3.20
3.48
3.10
As calculated going forward
Yield on securities - taxable
2.32
2.35
2.15
2.14
2.01
2.28
1.91
Yield on securities - tax-exempt
(1)
3.37
3.36
3.35
3.35
3.43
3.36
3.52
Total securities yield
(1)
3.07
3.07
3.00
3.02
3.04
3.05
3.04
Yield on interest-earning assets
(1)
4.68
3.98
3.64
3.72
3.64
4.11
3.58
Net interest spread
(1)
3.45
3.48
3.25
3.24
3.18
3.39
3.08
Net interest margin
(1)
3.56
3.52
3.29
3.30
3.23
3.46
3.12
Change
Yield on securities - taxable
(0.18)
(0.42)
(0.05)
0.03
0.05
(0.13)
0.04
Yield on securities - tax-exempt
(1)
(0.27)
(0.10)
0.04
0.18
0.23
(0.15)
0.20
Total securities yield
(1)
(0.26)
(0.22)
-
0.13
0.17
(0.15)
0.14
Yield on interest-earning assets
(1)
(0.05)
(0.03)
-
0.02
0.02
(0.03)
0.02
Net interest spread
(1)
(0.05)
(0.03)
-
0.02
0.02
(0.03)
0.02
Net interest margin
(1)
(0.04)
%
(0.03)
%
-
%
0.02
%
0.03
%
(0.02)
%
0.02
%
(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%.
Update to Customer Concentrations
As of September 30, 2022, the Company’s top 20 customer relationships represented approximately 24% or $1.2 billion of total
deposits. The Company believes that there are sufficient funding sources, including on-balance sheet liquid assets and wholesale deposit
options, so that an immediate reduction in these deposit balances would not be expected to have a material, detrimental effect on the
Company’s financial position or operations.
52
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,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands, except per share data)
Return on average assets
(1)
1.19
%
1.12
%
1.23
%
1.50
%
1.54
%
1.18
%
1.16
%
Return on average equity
(1)
11.18
%
10.15
%
10.44
%
12.57
%
12.92
%
10.59
%
10.24
%
Earnings per share
$
0.35
$
0.31
$
0.33
$
0.41
$
0.41
$
1.00
$
0.95
Diluted earnings per share
$
0.35
$
0.31
$
0.33
$
0.40
$
0.41
$
0.99
$
0.93
Efficiency
(2)
53.20
%
57.36
%
57.57
%
55.38
%
59.06
%
55.97
%
54.18
%
Ratio of equity to assets
9.93
%
10.65
%
11.29
%
11.88
%
12.08
%
9.93
%
12.08
%
(1)
(2)
Results of Operations
Net Interest Income
Net interest income is presented on a tax-equivalent basis below. Presentation on a tax-equivalent basis reflects all income as taxable at the same rate. For example, $100 of
tax-exempt income would be presented as $121.00, which represents the tax-exempt income amount plus the tax at the statutory federal income tax rate of 21%. 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,
2022
2022
2022
2021
2021
2022
2021
Yield on securities - tax-equivalent
(1)
3.07
%
3.07
%
3.00
%
3.02
%
3.04
%
3.05
%
3.04
%
Yield on loans
5.08
4.28
4.00
4.17
4.00
4.47
3.98
Yield on earning assets - tax-equivalent
(1)
4.68
3.98
3.64
3.72
3.64
4.11
3.58
Cost of interest-bearing deposits
1.56
0.56
0.41
0.43
0.47
0.87
0.51
Cost of total deposits
1.20
0.42
0.31
0.33
0.38
0.66
0.42
Cost of FHLB and short-term borrowings
2.18
1.66
1.95
3.03
1.82
1.87
1.80
Cost of funds
1.23
0.50
0.39
0.48
0.46
0.72
0.50
Net interest margin - tax-equivalent
(1)
3.56
%
3.52
%
3.29
%
3.30
%
3.23
%
3.46
%
3.12
%
(1)
53
The following tables present, for the periods indicated, average balance sheet information, interest income, interest expense and the corresponding average yield and rates
paid:
Three Months Ended
September 30, 2022
September 30, 2021
Average Balance
Interest Income
/ Expense
Average Yield /
Rate
(1)
Average Balance
Interest Income
/ Expense
Average Yield /
Rate
(1)
(Dollars in thousands)
Interest-earning assets:
Securities - taxable
$
213,775
$
1,241
2.32
%
$
191,636
$
964
2.01
%
Securities - tax-exempt
(2)
560,541
4,725
3.37
502,107
4,310
3.43
Interest-bearing deposits in other banks
231,345
1,193
2.05
313,188
121
0.15
Gross loans, net of unearned income
(3)(4)
4,626,684
59,211
5.08
4,230,553
42,664
4.00
Total interest-earning assets
(2)
5,632,345
$
66,370
4.68
%
5,237,484
$
48,059
3.64
%
Allowance for credit losses
(56,995)
(75,103)
Other non-interest-earning assets
188,997
246,603
Total assets
$
5,764,347
$
5,408,984
Interest-bearing liabilities
Transaction deposits
$
531,999
$
1,539
1.95
%
$
510,823
$
259
0.20
%
Savings and money market deposits
2,519,574
10,568
1.66
2,276,436
1,907
0.33
Time deposits
733,607
2,802
1.52
752,012
2,045
1.08
Total interest-bearing deposits
3,785,180
14,909
1.56
3,539,271
4,211
0.47
FHLB and short-term borrowings
165,196
907
2.18
278,154
1,275
1.82
Trust preferred securities, net of fair value
adjustments
1,037
39
14.58
988
24
9.63
Non-interest-bearing deposits
1,137,626
-
-
909,750
-
-
Cost of funds
5,089,039
$
15,855
1.23
%
4,728,163
$
5,510
0.46
%
Other liabilities
62,102
36,106
Stockholders’ equity
613,206
644,715
Total liabilities and stockholders’ equity
$
5,764,347
$
5,408,984
Net interest income - tax-equivalent
(2)
$
50,515
$
42,549
Net interest spread - tax-equivalent
(2)
3.46
%
3.18
%
Net interest margin - tax-equivalent
(2)
3.56
%
3.23
%
(1)
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.
(2)
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%.
(3)
Loans, net of unearned income include non-accrual loans of $17 million and $48 million as of September 30, 2022 and 2021, respectively.
(4)
Loan interest income includes loan fees of $3 million and $4 million for the three months ended September 30, 2022 and 2021, respectively.
54
Nine Months Ended
September 30, 2022
September 30, 2021
Average Balance
Interest Income
/ Expense
Average Yield /
Rate
(1)
Average Balance
Interest Income
/ Expense
Average Yield /
Rate
(1)
(Dollars in thousands)
Interest-earning assets:
Securities - taxable
$
218,421
$
3,728
2.28
%
$
203,633
$
2,911
1.91
%
Securities - tax-exempt
(2)
549,490
13,845
3.36
476,980
12,596
3.52
Interest-bearing deposits in other banks
246,213
1,714
0.93
390,588
359
0.12
Gross loans, net of unearned income
(3)(4)
4,466,887
149,266
4.47
4,381,213
130,268
3.98
Total interest-earning assets
(2)
5,481,011
$
168,553
4.11
%
5,452,414
$
146,134
3.58
%
Allowance for credit losses
(57,213)
(76,726)
Other non-interest-earning assets
201,519
249,816
Total assets
$
5,625,317
$
5,625,504
Interest-bearing liabilities
Transaction deposits
$
541,933
$
2,134
0.89
%
$
629,959
$
936
0.20
%
Savings and money market deposits
2,386,205
15,285
0.86
2,360,559
6,402
0.36
Time deposits
627,458
5,733
1.22
863,592
7,451
1.15
Total interest-bearing deposits
3,555,596
23,152
0.87
3,854,110
14,789
0.51
FHLB and short-term borrowings
241,897
3,385
1.87
285,371
3,841
1.80
Trust preferred securities, net of fair value
adjustments
1,024
94
12.29
976
72
9.80
Non-interest-bearing deposits
1,148,150
-
-
814,924
-
-
Cost of funds
4,946,667
$
26,631
0.72
%
4,955,381
$
18,702
0.50
%
Other liabilities
51,634
35,385
Stockholders’ equity
627,016
634,738
Total liabilities and stockholders’ equity
$
5,625,317
$
5,625,504
Net interest income - tax-equivalent
(2)
$
141,922
$
127,432
Net interest spread - tax-equivalent
(2)
3.39
%
3.08
%
Net interest margin - tax-equivalent
(2)
3.46
%
3.12
%
(1)
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.
(2)
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%.
(3)
Loans, net of unearned income include non-accrual loans of $17 million and $48 million as of September 30, 2022 and 2021, respectively.
(4)
Loan interest income includes loan fees of $10 million and $13 million for the nine months ended September 30, 2022 and 2021, respectively.
55
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).
Three Months Ended
Nine Months Ended
September 30, 2022 over 2021
September 30, 2022 over 2021
Average Volume
Yield/Rate
Net Change
(1)
Average Volume
Yield/Rate
Net Change
(1)
(Dollars in thousands)
Interest Income
Securities - taxable
$
119
$
158
$
277
$
222
$
595
$
817
Securities - tax-exempt
(2)
501
(86)
415
1,840
(591)
1,249
Interest-bearing deposits in other banks
(39)
1,111
1,072
(176)
1,531
1,355
Gross loans, net of unearned income
4,251
12,296
16,547
2,604
16,394
18,998
Total interest income
(2)
$
4,832
$
13,479
$
18,311
$
4,490
$
17,929
$
22,419
Interest Expense
Transaction deposits
$
5
$
1,275
$
1,280
$
(207)
$
1,405
$
1,198
Savings and money market deposits
223
8,438
8,661
69
8,814
8,883
Time deposits
(49)
806
757
(2,145)
427
(1,718)
Total interest-bearing deposits
179
10,519
10,698
(2,283)
10,646
8,363
FHLB and short-term borrowings
(583)
215
(368)
(601)
145
(456)
Trust preferred securities, net of fair value adjustments
1
14
15
4
18
22
Total interest expense
(403)
10,748
10,345
(2,880)
10,809
7,929
Net interest income
(2)
$
5,235
$
2,731
$
7,966
$
7,370
$
7,120
$
14,490
(1)
(2)
Interest income -
outstanding and higher interest rates. The yield on taxable securities benefited from a slowdown in mortgage-backed securities (“MBS”) prepayments that reduced the premium
amortization on MBS by $0.2 million and $0.7 million for the three- and nine-month periods ended September 30, 2022, respectively. The loan yield for the three-month period
ended September 30, 2022, benefited from $1.0 million in interest income related to recoveries of interest income and loans placed back on accrual status. Loan yields for the three-
and nine-month periods ended September 30, 2022 compared to the corresponding periods in 2021 were partially offset by lower PPP loan fees of $1.5 million and $4.8 million,
respectively.
Average earning assets totaled $5.6 billion for the three-month period ended September 30, 2022 and $5.5 billion for the nine-month period ended September 30, 2022, resulting in
increases of $395 million or 8% and $29 million or 1%, respectively compared to the same periods in 2021. The increases were driven by higher average gross loans , average taxable
56
securities, and average tax-exempt securities, partially offset by a reduction in average interest-bearing deposits in other banks for the three- and nine-month periods ended
September 30, 2022 compared to the corresponding periods in 2021.
Interest expense
average interest-bearing deposits. Interest expense increased for the nine-month period ended September 30, 2022 compared to the same period in 2021 due to higher interest rates,
partially offset by lower average interest-bearing deposits.
Average interest-bearing deposits for the three-month period ended September 30, 2022 increased $246 million or 7% compared to the same period in the prior year. Average
interest-bearing deposits for the nine-month period ended September 30, 2022 decreased $299 million or 8% compared to the same period in the 2021. For the three- and nine-month
periods ended September 30, 2022 non-interest-bearing deposits increased compared to the corresponding periods in 2021.
Net interest income
earning assets repricing quicker than the cost of interest-bearing liabilities as variable rate loans tied to 30-day London Interbank Offered Rate (“LIBOR”) and Secured Overnight
Financing Rate (“SOFR”) rates were rising faster than the Company’s deposit rates that are typically adjusted when the federal funds rate changes. The Company currently
anticipates net interest margin for the fourth quarter of 2022 to be in the range of 3.45% to 3.55% because of the Company’s variable-rate assets and the rising rate environment,
although deposit migration and remaining pressure on loan pricing are expected to be headwinds.
Impact of Transition Away from LIBOR
The Company had $735 million in loans tied to LIBOR at September 30, 2022. 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 (“SOFR”). At September 30, 2022, the Company had approximately $959 million in loans tied to SOFR. 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
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands)
Total non-interest income (expense)
$
3,780
$
4,201
$
4,942
$
4,796
$
(1,105)
$
12,922
$
8,864
Non-interest income (expense) to average assets
(1)
0.26
%
0.30
%
0.36
%
0.34
%
(0.08)
%
0.31
%
0.21
%
(1)
Interim periods annualized.
57
The components of non-interest income were as follows for the periods shown:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Change
Change
2022
2021
$
%
2022
2021
$
%
(Dollars in thousands)
Service charges and fees on customer accounts
$
1,566
$
1,196
$
370
31
%
$
4,520
$
3,330
$
1,190
36
%
Realized gains (losses) on available-for-sale securities
(4)
1,046
(1,050)
NM
(43)
1,043
(1,086)
NM
Unrealized gains (losses), net on equity securities
(87)
(6,210)
6,123
(99)
(261)
(6,243)
5,982
(96)
Income from bank-owned life insurance
405
427
(22)
(5)
1,200
3,088
(1,888)
(61)
Swap fees and credit valuation adjustments, net
(7)
31
(38)
123
156
(33)
(21)
ATM and credit card interchange income
1,326
1,735
(409)
(24)
5,513
5,569
(56)
(1)
Other non-interest income
581
670
(89)
(13)
1,870
1,921
(51)
(3)
Total non-interest income (loss)
$
3,780
$
(1,105)
$
4,885
NM
%
$
12,922
$
8,864
$
4,058
46
%
The changes in non-interest income were driven primarily by the following:
Service charges and fees on customer accounts
month periods ended September 30, 2022 compared to the corresponding periods in 2021 was driven primarily by increases in account analysis fees due to customer growth ,
increases in outstanding balances, and adjustments to the Company’s fee structure.
Realized gains (losses) on available-for-sale securities
– The decrease for the three- and nine-months ended September 30, 2022 compared to the same periods for 2021 was due to
the sale of $16 million in tax-exempt securities during the three- and nine-month periods ended September 30, 2021 at a gain due to increases in interest rates.
Unrealized gains (losses), net on equity securities
Company recording a $6 million unrealized loss during the third quarter of 2021 related to an equity investment received as part of a modified loan agreement.
Income from bank-owned life insurance (“BOLI”)
– The decline in BOLI income for the nine-months ended September 30, 2022 compared to the same period in 2021 related to
the recognition of $1.8 million in tax-free death benefits from a BOLI policy during 2021 compared to no such proceeds for 2022.
ATM and credit card interchange income
the same periods in 2021 was driven primarily by a decrease in credit card interest income associated with customers that mobilized their workforce during the COVID-19 pandemic
in 2021, partially offset by customer growth.
58
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,
2022
2022
2022
2021
2021
2022
2021
(1)
(Dollars in thousands)
Total non-interest expense
$
28,451
$
29,203
$
27,666
$
26,715
$
24,036
$
85,319
$
72,667
Non-interest expense to average assets
(1)
1.96
%
2.11
%
2.02
%
1.93
%
1.76
%
2.03
%
1.73
%
(1)
The components of non-interest expense were as follows for the periods indicated:
Quarter Ended
Nine Months Ended
September 30,
September 30,
Change
Change
2022
2021
$
%
2022
2021
$
%
(Dollars in thousands)
Salary and employee benefits
$
18,252
$
15,399
$
2,853
19
%
$
53,288
$
44,612
$
8,676
19
%
Occupancy
2,736
2,416
320
13
7,851
7,307
544
7
Professional fees
580
618
(38)
(6)
2,453
2,538
(85)
(3)
Deposit insurance premiums
903
927
(24)
(3)
2,355
2,995
(640)
(21)
Data processing
877
700
177
25
2,849
2,136
713
33
Advertising
796
596
200
34
2,247
1,334
913
68
Software and communication
1,222
999
223
22
3,689
3,098
591
19
Foreclosed assets, net
9
(35)
44
NM
(30)
680
(710)
NM
Other non-interest expense
3,076
2,416
660
27
10,617
7,967
2,650
33
Total non-interest expense
$
28,451
$
24,036
$
4,415
18
%
$
85,319
$
72,667
$
12,652
17
%
The changes in non-interest expense were driven primarily by the following:
Salary and Employee Benefits
2021 primarily due to the impact of continued hiring for production talent in a competitive environment, annual merit increases, and an increase related to a change in the maximum
401(k) plan match from 3.5% in 2021 to 5.0% in 2022. For the nine-month period ended September 30, 2022 compared to the same period in 2021, the increase also included higher
incentive costs.
Occupancy
Deposit Insurance Premiums
ended September 30, 2022 compared to the same periods in 2021 as a result of changes in asset quality. We currently anticipate deposit insurance premiums will increase over the
next quarter because of expected loan growth and the common stock repurchase program.
Data Processing
59
Advertising
periods in 2021 because of COVID-19 pandemic restrictions being lifted.
Software and Communication
of online tools, and effectively analyze data to monitor operational trends. In addition, a portion of the increase in costs was due to our growth. We currently anticipate our software
and communication costs to continue to increase in 2022 as we continue adding and implementing new software products that improve our customers’ experience and our operating
efficiency.
Foreclosed Assets, net
a commercial use facility foreclosed upon in 2020 during the three-month period ended June 30, 2021.
Other Non-interest Expense
- Other non-interest expense increased for the three- and nine-month periods ended September 30, 2022 compared to the same period s in 2021 due to
higher commercial card costs as a result of increased use by current customers and customer growth, an increase in insured cash sweep (“ICS”) deposits which drove related fees
higher, and increased travel and meeting costs due to COVID-19 pandemic restrictions being lifted. Additionally, the nine-month period ended September 30, 2022 included $1.1
million in employee separation costs.
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,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands)
Income tax expense
$
4,410
$
4,027
$
4,188
$
5,725
$
5,660
$
12,625
$
11,831
Income before income taxes
21,690
19,572
21,016
26,526
26,660
62,278
60,443
Effective tax rate
20
%
21
%
20
%
22
%
21
%
20
%
20
%
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
BOLI and tax-exempt municipal securities; state tax credits; and permanent tax differences from equity-based compensation. Refer to “Note 10: Income Tax” within the Notes to
Condensed Consolidated Financial Statements (unaudited) for a reconciliation of the statutory rate to the Company’s actual income tax expense.
During the three- and nine-month periods ended September 30, 2022, the Company’s effective tax rate benefited from permanent tax differences related to tax-exempt interest.
During the three- and nine-month periods ended September 30, 2021, the Company benefited from permanent tax differences related to tax-exempt interest and $1.8 million in BOLI
settlement benefits that reduced income taxes by $0.4 million and reduced the effective tax rate by approximately 2%.
We currently anticipate the Company’s effective tax rate to remain within the 20% to 22% range in the near term.
60
Analysis of Financial Condition
Securities Portfolio
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. The securities portfolio is also maintained to serve as a contingent, on-balance
sheet source of liquidity. As of September 30, 2022, available-for-sale investments totaled $657 million, a decrease of $89 million from
December 31, 2021.
The decline in the securities portfolio was driven by a $137 million decline in the unrealized gain (loss) on available-for-sale
securities. The decline was partially offset by the purchase of $45 million in tax-exempt municipal securities and $35 million in
mortgage-backed securities. The Company currently anticipates continuing to grow the securities portfolio in proportion to the growth
of the balance sheet. The Company anticipates additional unrealized losses as interest rates continue to increase. For additional
information, see “Note 3: Securities” in the Notes to Condensed Consolidated Financial Statements (unaudited).
61
Loan Portfolio
Refer to “Note 4: Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information
regarding the Company’s loan portfolio. As of September 30, 2022, gross loans, net of unearned fees increased $421 million or 10% from December 31, 2021 and was driven by the
following:
Commercial and Industrial Lines of Credit
Energy
new originations of $64 million.
Commercial Real Estate
Construction and Land Development
- The $99 million or 17% increase was driven by new originations of $110 million.
Residential Real Estate
- The $34 million or 9% increase was driven by new originations of $62 million, offset by $42 million loans paid off.
Multifamily Real Estate
- The $36 million or 15% increase was driven by new originations of $30 million.
The following table shows the contractual maturities of our gross loans and sensitivity to interest rate changes:
As of September 30, 2022
Due in One Year or Less
Due in One Year through
Five Years
Due in Five Year 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 and industrial
$
25,889
$
44,014
$
268,276
$
381,009
$
53,496
$
65,483
$
19,669
$
-
$
857,836
Commercial and industrial
lines of credit
48,030
307,620
16,237
443,233
10,414
5,653
-
-
831,187
Energy
8
40,172
9,448
129,227
-
-
-
-
178,855
Commercial real estate
34,313
193,897
427,932
348,355
181,577
199,339
-
14,925
1,400,338
Construction and land
development
22,434
54,461
73,783
442,656
24,426
16,448
1,637
38,196
674,041
Residential real estate
2,673
270
11,764
3,008
86,286
2,401
882
286,583
393,867
Multifamily real estate
21,416
70,755
44,286
127,202
4,967
7,169
-
-
275,795
Consumer
4,779
14,971
13,719
7,612
-
23,115
-
1,531
65,727
Total
$
159,542
$
726,160
$
865,445
$
1,882,302
$
361,166
$
319,608
$
22,188
$
341,235
$
4,677,646
62
Provision and Allowance for Credit Losses
The Company implemented the CECL model as of January 1, 2022. Refer to “Note 1: Nature of Operations and Summary of Significant Accounting Policies” and “Note 4:
Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (unaudited) for details regarding the transition, including the impact to
the financial statements. The CECL model compared to the incurred loss model may accelerate the provision for credit losses if the Company’s loan portfolio continues to grow. In
addition, positive (negative) forward-looking indicators may decrease (increase) the required provision for credit losses.
The ACL at September 30, 2022 represents our best estimate of the expected credit losses in the Company’s loan portfolio and off-balance sheet commitments, measured over
the contractual life of the underlying instrument.
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands)
Provision for credit losses
(1)
$
1,923
$
1,690
$
(316)
$
(5,000)
$
(10,000)
$
3,297
$
1,000
Provision for credit losses
(1)
1,411
445
(309)
N/A
N/A
1,547
N/A
Allowance for credit losses
(2)
55,864
55,817
55,231
58,375
64,152
55,864
64,152
Allowance for credit losses
(2)
6,731
5,320
4,875
N/A
N/A
6,731
N/A
Net charge-offs
$
1,876
$
1,104
$
1,081
$
777
$
1,341
$
4,061
$
12,143
(1)
Prior to March 31, 2022, this line represents the provision for loan losses
(2)
Prior to March 31, 2022, this line represents the allowance for loan and lease losses
January 1, 2022, the adoption date, is presented below instead of December 31, 2021 for comparability purposes. 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 credit losses as of the dates indicated:
63
September 30, 2022
January 1, 2022
ACL Amount
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
ACL Amount
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
Loans
Off-
Balance
Sheet
Total
Loans
Off-
Balance
Sheet
Total
(Dollars in thousands)
Commercial and industrial
$
11,337
$
97
$
11,434
18
%
18
%
$
10,139
$
107
$
10,246
17
%
20
%
Commercial and industrial
lines of credit
12,057
-
12,057
19
18
8,866
44
8,910
14
14
Energy
4,828
548
5,376
9
4
9,190
265
9,455
15
7
Commercial real estate
16,455
676
17,131
28
31
18,933
711
19,644
32
30
Construction and land
development
4,587
5,320
9,907
16
14
3,666
3,914
7,580
12
14
Residential real estate
3,237
2
3,239
5
8
3,046
5
3,051
5
8
Multifamily real estate
2,673
84
2,757
4
6
2,465
137
2,602
4
6
Consumer
690
4
694
1
1
323
1
324
1
1
Total
$
55,864
$
6,731
$
62,595
100
%
100
%
$
56,628
$
5,184
$
61,812
100
%
100
%
Refer to “Note 4: Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (una udited) for a summary of the changes in the
ACL. Provided below is additional information regarding changes to the ACL:
Impaired Loans:
For the three- and nine-month periods ended September 30, 2022, the impaired loan reserve decreased $0.1 million and $5.6 million, respectively. The decrease was primarily
due to a restructured commercial loan relationship in which addition al collateral was obtained. For the nine-month period ended September 30, 2022, the change included a
commercial real estate loan with an improved collateral valuation that resulted in a $2 million reduction in the required reserve, a $0.6 million decline related to a commercial real
estate loan charged down and subsequently paid off, and two energy loans that paid down their outstanding balance, resulting in a $1 million decrease to the required reserve and one
energy loan that was charged down, resulting in a $1 million decrease in the required reserve.
Charge-offs and Recoveries:
Net charge-offs were $2 million and $4 million for the three- and nine-month periods ended September 30, 2022, respectively. For the three-month period ended September
30, 2022 charge-offs included $0.6 million related to two collateral-dependent energy loans and $2.0 million related to a collateral-dependent commercial and industrial line of credit
loan. Recoveries primarily included $0.8 million related to a commercial real estate loan charged-off earlier in 2022.
For the nine-month period ended September 30, 2022, charge-offs also included $2.0 million related to a collateral-dependent commercial and industrial line of credit that
originated in 2018 and started to deteriorate at the end of 2021; a $1 million charge-off related to an energy loan originated in 2016 that was significantly impacted by lower oil
prices over the past few years; a $0.8 million charge-off on a commercial real estate project that originated in 2017 and started to deteriorate in 2020; $2.9 million related to two
collateral-dependent energy loans; $0.6 million related to a commercial and industrial SBA loan originated in 2018; and $0.2 million related to a junior lien on a residential real estate
64
loan. Charge-offs were partially offset primarily by a $1.8 million recovery on an energy loan that was charged-off in 2020, $1.6 million related to a commercial real estate loan
charged-off in 2020 and $1.7 million related to a commercial and industrial line of credit charged-off in 2020.
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 remained on the energy loan at September 30, 2021. Recoveries totaled $0.2 million
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 and industrial borrower. The $3 million charged-off was greater than the reserved
balance in the Allowance for Loan and Lease Loss at December 31, 2020 resulting in a $2 million increase in the provision during the three- and six-month periods ended June 30,
2021.
During the three-months ended March 31, 2021, charge-offs primarily related to two commercial and industrial borrowers that were unable to support their debt obligations.
The $8 million charged-off was greater than the reserved balance in the allowance for loan losses at December 31, 2020 resulting in a $5 million increase in the provision during the
quarter ended March 31, 2021.
The below table provides the ratio of net charge-offs (recoveries) to average loans outstanding based on our loan categories for the periods indicated:
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Commercial and industrial
-
%
0.28
%
(0.27)
%
0.27
%
0.04
%
0.01
%
0.02
%
Commercial and industrial lines of credit
1.10
(0.56)
0.76
0.04
0.62
0.36
3.12
Energy
1.19
4.77
(1.02)
0.68
0.64
1.64
0.22
Commercial real estate
(0.21)
(0.45)
0.34
-
-
(0.12)
-
Construction and land development
-
-
-
-
-
-
-
Residential real estate
-
0.21
-
(0.32)
-
0.07
-
Multifamily real estate
-
-
-
(0.06)
(0.01)
-
-
Consumer
(0.05)
-
0.05
(0.01)
(0.03)
-
0.06
Total net charge-offs to average loans
0.16
%
0.10
%
0.10
%
0.07
%
0.13
%
0.12
%
0.37
%
Non-performing Assets and Other Asset Quality Metrics
Non-performing assets include: (i) non-performing loans - includes non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under
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.
Non-performing assets decreased to $18 million as of September 30, 2022 due to an $11 million decrease in non-accrual loans and a $2 million decrease in loans past due 90
days or more and still accruing interest. The decline in non-accrual loans was driven by $4 million in loans returned to accruing status, $3 million in charge-offs on non-accrual
loans, and $3 million in non-accrual loans that paid off. Improvements in credit metrics continue to be driven by upgrades in COVID-19 impacted segments and the energy portfolio.
Non-performing assets decreased to $31 million as of June 30, 2022 due to a $5 million decrease in non-accrual loans. The decline was driven by $4 million in charge-offs on
non-accrual loans. Improvements in credit metrics were driven by upgrades in COVID-19 impacted segments and the energy portfolio.
65
Non-performing assets increased slightly to $36 million or 0.64% of total assets as of March 31, 2022 primarily due to an $11 million, previously identified substandard
commercial and industrial line of credit. The increase was partially offset by a $7 million decline in non-accrual energy loans due to $1 million in charge-offs, $3 million in payoffs
and $3 million in loans placed back on accrual status. As of March 31, 2022, 25% of non-performing assets remained in the energy sector.
During 2021, non-performing assets continued to decrease due primarily to upgrades and pay offs in the commercial and industrial and energy portfolios. As of December 31,
2021, 49% of non-performing assets related to energy credits that were significantly impacted by lower oil prices over previous few years.
Credit quality metrics were generally improved during the third quarter of 2022, reflecting overall improvement from the prior quarter and significant improvement over the
prior year.
The table below summarizes our non-performing assets and related ratios as of the dates indicated:
For the Quarter Ended
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
(Dollars in thousands)
Non-accrual loans
$
16,923
$
27,698
$
33,071
$
31,432
$
48,147
Loans past due 90 days or more and still accruing
303
2,163
1,534
90
342
Total non-performing loans
17,226
29,861
34,605
31,522
48,489
Foreclosed assets held for sale
973
973
973
1,148
1,148
Total non-performing assets
$
18,199
$
30,834
$
35,578
$
32,670
$
49,637
ACL to total loans
1.19
%
1.23
%
1.27
%
1.37
%
1.51
%
ACL + ACL on off-balance sheet to total loans
(1)
1.34
1.35
1.38
ACL to non-accrual loans
330
202
167
186
133
ACL to non-performing loans
324
187
160
185
132
Non-accrual loans to total loans
0.36
0.61
0.76
0.74
1.13
Non-performing loans to total loans
0.37
0.66
0.79
0.74
1.15
Non-performing assets to total assets
0.31
%
0.54
%
0.64
%
0.58
%
0.92
%
(1)
Includes the ACL on off-balance sheet credit exposure that resulted from CECL adoption on January 1, 2022.
Other asset quality metrics management reviews include loans past due 30 - 89 days and classified, gross loans. The Company defines classified loans as loans categorized as
substandard - performing, substandard – non-performing, doubtful, or loss. The definitions of substandard, doubtful and loss are provided in “Note 4: Loans and Allowance for
Credit Losses” in the Notes to Condensed Consolidated Financial Statements (unaudited). The following table summarizes our loans past due 30 - 89 days, classified assets, and
related ratios as of the dates indicated:
66
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
(Dollars in thousands)
Loans Past Due Detail
30 - 59 days past due
$
15,785
$
15,700
$
14,815
$
1,671
$
3,072
60 - 89 days past due
5,598
935
1,135
1,858
34,528
Total gross loans 30 - 89 days past due
$
21,383
$
16,635
$
15,950
$
3,529
$
37,600
Loans 30 - 89 days past due / gross loans
0.46
%
0.37
%
0.37
%
0.08
%
0.89
%
Classified Loans
Substandard - performing
$
55,038
$
52,759
$
40,257
$
47,275
$
75,999
Substandard - non-performing
15,135
25,530
30,619
28,879
45,063
Doubtful
1,788
2,144
2,451
2,554
3,084
Loss
-
-
-
-
-
Total classified, gross loans
71,961
80,433
73,327
78,708
124,146
Foreclosed assets held for sale
973
973
973
1,148
1,148
Total classified assets
$
72,934
$
81,406
$
74,300
$
79,856
$
125,294
Classified loans / (total capital + ACL)
11.3
%
12.1
%
10.8
%
10.8
%
17.3
%
Classified loans / (total capital + ACL + ACL on off-
balance sheet)
(1)
11.2
12.0
10.7
Classified assets / (total capital + ACL)
11.5
%
12.3
%
11.0
%
11.0
%
17.5
%
(1)
Includes the ACL on off-balance sheet credit exposure that resulted from CECL adoption on January 1, 2022.
The increase in loans past due between 30 and 89 days as of September 30, 2022 was primarily driven by net increases in commercial real estate loans . Loans past due
between 30 and 89 days to gross loans increased to 0.46% compared to the prior quarter. Classified loans decreased 11% during the third quarter primarily due to lower non-accrual
loans in the commercial and industrial and commercial real estate portfolios.
The increase in loans past due between 30 and 89 days as of June 30, 2022 was primarily driven by the 4% loan growth from the previous quarter. Loans past due between 30
and 89 days to gross loans remained at 0.37% compared to the prior quarter. Classified loans increased slightly during the second quarter primarily due to downgrades in the
commercial and industrial portfolio but remained in an acceptable range at 12.1% of total capital plus the allowance for credit losses.
The increase in loans past due between 30 and 89 days as of March 31, 2022 was primarily driven by an $11 million commercial and industrial line of credit. In the first
quarter of 2022, we experienced improvement in our classified loan totals as classified loans decreased 7% during the quarter to $73 million. Classified totals in the energy portfolio
decreased 24% to $16 million compared to the prior quarter and represent ed 22% of total classified loans.
67
Deposits and Other Borrowings
The following table sets forth the maturity of time deposits as of September 30, 2022:
As of September 30, 2022
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
$
35,188
$
22,271
$
27,877
$
159,675
$
245,011
Time deposits below FDIC insurance limit
176,316
100,125
125,601
103,118
505,160
Total
$
211,504
$
122,396
$
153,478
$
262,793
$
750,171
At September 30, 2022, our deposits totaled approximately $5 billion, an increase of $304 million or 6% from December 31, 2021. The increase included $126 million in time
deposits and $227 million in money market, NOW and savings deposits , partially offset by a decrease of $49 million in non-interest-bearing deposits . The increase in time deposits was
the result of a $179 million net increase in wholesale funding to support current and expected loan growth through the end of 2022, partially offset by a decrease in customer deposits.
The increase in money market, NOW, and savings deposits was driven primarily by increases in ICS deposits and both business and personal money market deposits.
Other borrowings include Federal Home Loan Bank (“FHLB”) advances and our trust preferred security. At September 30, 2022, other borrowings totaled $206 million, a $31
million or 13% decrease from December 31, 2021. During the nine-month period ended September 30, 2022, $21.5 million of FHLB advances matured, $12.5 million of net FHLB
advances were paid off and $65 million of advances converted into a drawdown on the FHLB line of credit. The Company utilized the conversion of $65 million of FHLB advances to
the FHLB line of credit and an additional $2.7 million of net withdrawals to support loan growth and changes in deposits, resulting in $67.7 million on the FHLB line of credit at
September 30, 2022.
As of September 30, 2022, the Company had approximately $2.4 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.
68
Liquidity and Capital Resources
Contractual Obligations and Off-Balance Sheet Arrangements
The Company is subject to contractual obligations made in the ordinary course of business. The obligations include deposit
liabilities, other borrowed funds, and operating leases. Refer to “Note 6: Time Deposits and Other Borrowings” within the Notes to
Condensed Consolidated Financial Statements (unaudited) for a listing of the Company’s significant contractual cash obligations. Refer
to “Note 14: Leases” within the Notes to Condensed Consolidated Financial Statements (unaudited) for the Company’s contractual
obligations to third parties on lease obligations.
As a financial services provider, the Company is a party to various financial instruments with off-balance sheet risks, such as
commitments to extend credit. Off-balance sheet arrangements represent the Company’s future cash requirements. However, a portion
of these commitments may expire without being drawn upon. Refer to “Note 12: Commitments and Credit Risk” within the Notes to
Condensed Consolidated Financial Statements (unaudited) for a listing of the Company’s off -balance sheet arrangements.
The Company’s short-term and long -term contractual obligations, including off-balance sheet obligations, may be satisfied
through the Company’s on-balance sheet and off-balance sheet liquidity discussed below.
Liquidity
The Company’s liquidity strategy is to maintain adequate, but not excessive, liquidity to meet the daily cash flow needs of clients
while attempting to achieve adequate earnings for stockholders. The liquidity position is monitored continuously by management. The
Company's short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of
prepaying and maturing balances in our loan portfolio and security portfolio, increases in client deposits and wholesale deposits.
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. The Company’s
on-balance sheet and off-balance sheet liquidity resources consisted of the following as of the dates indicated:
September 30, 2022
December 31, 2021
(Dollars in thousands)
Total on-balance sheet liquidity
$
964,952
$
1,224,253
Total off-balance sheet liquidity
779,990
732,748
Total liquidity
$
1,744,942
$
1,957,001
On-balance sheet liquidity as a percent of assets
17
%
22
%
Total liquidity as a percent of assets
30
%
35
%
For the nine-months ended September 30, 2022, the Company’s cash and cash equivalents declined $174 million from December
31, 2021 to $309 million, representing 5% of total assets. During the nine-month period ended September 30, 2022, the Company
increased the AFS securities portfolio on an amortized cost basis by $48 million, net of paydowns, maturities, and amortization, to
improve the yield on interest-earning assets. In addition, the Company increased loan funding by $425 million, net of payoffs and
charge-offs during the nine-month period ended September 30, 2022 that reduced cash and cash equivalents.
The Company’s time deposits increased by $126 million primarily from wholesale funding. Non-interest-bearing deposits,
savings, and money market deposits increased $178 million driven primarily by increases in ICS deposits and both business and
personal money market deposits. Other borrowings decreased $31 million during the nine-month period ended September 30, 2022, as
net amounts of $34 million of FHLB advances matured or were paid off and a net $3 million was drawn down on the FHLB line of
credit.
The Company continued its repurchase program, purchasing $31 million of common stock during the first nine months of 2022.
As of September 30, 2022, $21 million remains available for repurchase under our share repurchase program. We expect to continue to
repurchase shares under our share repurchase program, but the amount and timing of such repurchases will be dependent on a number of
69
factors, including the price of our common stock and other cash flow needs. There is no assurance that we will repurchase up to the full
amount remaining under our program.
The Company believes that its current liquidity will be sufficient to meet anticipated cash requirements for the next 12 months
and thereafter. The Company believes that is has several on and off-balance sheet options to address any resulting reductions in cash and
cash equivalents in order to maintain appropriate liquidity.
Capital Requirements
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:
Regulatory Matters” in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information. Management
believes that as of September 30, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial
services industry. Application of these principles requires management to make complex and subjective estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. The Company bases estimates on historical experience
and on various other assumptions that it believes to be reasonable under current circumstances. These assumptions form the basis for
management judgments about the carrying values of assets and liabilities that are not readily available from independent, objective
sources. The Company evaluates estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly
different estimates. Actual results may differ from these estimates.
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 2021 Form 10-K.
On January 1, 2022, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. Refer to “Note 1: Nature of Operations and Summary of Significant Accounting Policies” and
“Note 4: Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (unaudited) for
information regarding the Company’s ACL implementation and the ACL process. Determining the appropriateness of the ACL is
complex and requires judgment by management about the effect of matters that are inherently uncertain. These critical estimates include
significant use of the Company’s historical data and complex methods to interpret them.
It is difficult to estimate how potential changes in any one input might affect the overall ACL because inputs may change at
different rates and may not be consistent across the loan segments. In addition, changes in inputs may be directionally inconsistent such
that one factor may offset deterioration in others. The Company identified the following estimates and assumptions as the main drivers
in the required ACL for loans and the reserve for off-balance sheet commitments:
◾
Fully exhausted loan pool
“cohort”) and tracking the cohort’s charge-offs, net of recoveries, over a 10-year period (known as the estimated
economic life). A charge-off rate for each cohort is calculated based on charge-offs, net of recoveries over the initial loan
balance. The charge-off rate for a specific cohort is not included in the weighted average historical loss rate until “fully
exhausted.”
A cohort balance declines due to modifications, renewals, and paydowns. The Company requires the remaining cohort
balance to be less than 15% of its original cohort balance before being included in the historical loss factor. The 15%
70
represents the exhaustion rate. Changes to the assumed exhaustion rate could increase or decrease the historical loss rates
based on the timing of charge-offs, net of recoveries.
◾
Forward looking factors
expected losses based on an economic outlook. The Company’s current methodology increases the ACL one basis point
for each 1% increase in the average unemployment rate forecast.
◾
Changes in the assumed utilization rate of off-balance sheet commitments
historical utilization rate for all loan segments, excluding construction and development loans that use a higher
utilization rate. An ACL on off-balance sheet commitments is required if the end of period utilization rate is less than the
12-month historical utilization rate.
Besides the ACL methodology mentioned above, there have been no additional changes in the Company’s application of critical
accounting policies and estimates since December 31, 2021.
Recent Accounting Pronouncements
Refer to “Note 1: Nature of Operations and Summary of Significant Accounting Policies” included in the Notes to Condensed
Consolidated Financial Statements (unaudited) included elsewhere in this Form 10-Q.
71
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 net interest margins 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 Asset/Liability Committee (“ALCO”). The ALCO 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 ALCO’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 ALCO 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, 2022
September 30, 2021
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
6.1
%
(11.1)
%
6.4
%
(8.9)
%
+200
4.1
(7.3)
3.6
(5.7)
+100
2.0
(3.2)
1.1
(3.0)
Base
-
%
-
%
-
%
-
%
-100
(1.9)
3.2
NA
(1)
NA
(1)
-200
(5.7)
5.7
NA
(1)
NA
(1)
-300
(10.1)
7.1
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, 2022
September 30, 2021
Change in Interest Rate
Percent change in net interest
income
Percent change in net interest
income
+300
2.9
%
2.5
%
+200
1.9
1.2
+100
1.0
0.2
Base
-
%
-
%
-100
(0.9)
NA
(1)
-200
(2.1)
NA
(1)
-300
(4.1)
NA
(1)
(1)
72
The Company’s position is slightly asset sensitive as of September 30, 2022. The hypothetical positive change in net interest
income as of September 30, 2022 in an up 100 basis point shock is mainly due to approximately $3.6 billion of the Company’s earning
assets repricing or maturing within the first year, with $2.8 billion of that being in the first month. In addition, $624 million of the
Company’s time deposits and other borrowings mature or reprice within that same 12-month period. Assuming the same balance sheet
mix, the Company currently anticipates an increase to net interest income in all upward rate ramp and shock scenarios. In down rate
scenarios, income is predicted to decrease. The Company is monitoring longer term interest rate expectations and is evaluating options
to reduce the impact of any downward rate adjustments, including the use of hedges.
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, 2022. 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, 2022.
Changes in Internal Control over Financial Reporting
The Company implemented internal controls to ensure the Company adequately calculated changes due to, and properly assessed
the impact of, the accounting standard updates related to the adoption of ASC 326 on January 1, 2022. There were no significant
changes to our internal control over financial reporting due to the adoption of the new standard.
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 2022 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, you should carefully consider the factors discussed in Part I, "Item 1A.
Risk Factors" in our 2021 Form 10-K, which could materially affect our business, financial condition, or results of operations in future
periods. There were no material changes from the risk factors disclosed in the 2021 Form 10-K.
73
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
None.
(b)
Not applicable.
(c)
Share Repurchase Program
The following table summarizes our repurchases of our common shares for the three-months ended September 30, 2022:
Calendar Month
Total Number of
Shares
Repurchased
Average Price
Paid per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
(1)
Approximate Dollar Value of Shares that
may yet be Purchased as Part of
Publicly Announced Plans or
Programs
(1)
July 1 - 31
243,254
$
13.26
243,254
$
28,273,238
August 1 - 31
304,668
$
14.16
304,668
$
23,950,841
September 1 - 30
246,535
$
13.28
246,535
$
20,672,141
Total
794,457
$
13.61
794,457
(1)
Company could repurchase up to $30 million of its common stock. This program was completed during the third quarter of 2022.
On May 10, 2022, the Company announced that its Board of Directors approved a second share repurchase program under which
the Company may repurchase up to $30 million of its common stock. As of September 30, 2022, $21 million remains available for
repurchase under this share repurchase program. Repurchases under the program may be made in the open market or privately
negotiated transactions in compliance with SEC Rule 10b-18, subject to market conditions, applicable legal requirements, and other
relevant factors. The program does not obligate the Company to acquire any amount of common stock and may be suspended at any
time at the Company's discretion. No time limit has been set for completion of the program.
74
ITEM 6. EXHIBITS
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 management contract or compensatory plan arrangement
75
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 8, 2022
/s/ Benjamin R. Clouse
Benjamin R. Clouse
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Maddox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CrossFirst Bankshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: November 8, 2022
/s/ Michael J. Maddox
Michael J. Maddox
President and Chief Executive Officer
(Principal Executive Officer)
Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Benjamin R. Clouse, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CrossFirst Bankshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: November 8, 2022
/s/ Benjamin R. Clouse
Benjamin R. Clouse
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
UNDER 18 U.S.C. § 1350 FURNISHED PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(b)
In connection with the Quarterly Report of CrossFirst Bankshares, Inc. (the “Company”) on Form 10-Q for the period ended on
September 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in
his respective capacities indicated below, hereby certifies, pursuant to 18 U.S.C. § 1350, as enacted by Section 906 of the Sarbanes-Oxley
Act of 2002, that, to his knowledge and belief, (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
Date: November 8, 2022
/s/ Michael J. Maddox
Michael J. Maddox
President and Chief Executive Officer (Principal Executive Officer)
/s/ Benjamin R. Clouse
Benjamin R. Clouse
Chief Financial Officer (Principal Financial Officer)