UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
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(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
(Address of principal executive offices)
(Zip Code)
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(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
The
Nasdaq
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). Yes
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Non-accelerated filer
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Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes -Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
The aggregate market value of voting stock held by nonaffiliates of the Registrant was $
of CrossFirst Bankshares, Inc. Common Shares of $13.75 as reported on the NASDAQ Global Select Market).
As of February 25, 2022, the registrant had
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Annual Report on Form 10-K incorporates by reference certain
information from the registrant’s definitive proxy statement with respect to its 202 2 annual meeting of stockholders, which will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
2
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. These forward-looking statements reflect our current views
with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through
the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,”
“anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “aim,” “would,” “annualized” and “outlook,” or the
negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking
statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs
and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly,
we caution that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions,
estimates, and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking
statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the
forward-looking statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-
looking statements, including, but not limited to, the following:
• risks associated with the current outbreak of the novel coronavirus, or COVID-19;
• our ability to effectively execute our expansion strategy and manage our growth, including identifying and consummating suitable
mergers and acquisitions and integrating merged and acquired companies;
• business and economic conditions, particularly those affecting our market areas in Kansas, Missouri, Oklahoma, Texas and
Arizona, including a decrease in or the volatility of oil and gas prices or agricultural commodity prices within the region;
• the geographic concentration of our markets in Kansas, Missouri, Oklahoma, Texas and Arizona;
• concentrations of loans secured by real estate and energy located in our market areas;
• risks associated with our commercial loan portfolio, including the risk for deterioration in value of the general business assets that
secure such loans;
• borrower and depositor concentration risks;
• our ability to maintain our reputation;
• our ability to successfully manage our credit risk and the sufficiency of our allowance;
• reinvestment risks associated with a significant portion of our loan portfolio maturing in one year or less;
• our ability to attract, hire and retain qualified management personnel;
• our dependence on our management team, including our ability to retain executive officers and key employees and their customer
and community relationships;
• changes in the anticipated rate hikes by the Federal Open Market Committee;
• fluctuations in interest rates and the fair value of our investment securities, which could have an adverse effect on our profitability;
• competition from banks, credit unions and other financial services providers;
• our ability to maintain sufficient liquidity and capital;
• system failures, service denials, cyber-attacks and security breaches;
• our ability to maintain effective internal control over financial reporting;
• employee error, fraudulent activity by employees or customers and inaccurate or incomplete information about our customers and
counterparties;
• increased capital requirements imposed by banking regulators, which may require us to raise capital at a time when capital is not
available on favorable terms or at all;
• costs and effects of litigation, investigations or similar matters to which we may be subject, including any effect on our reputation;
• severe weather, acts of god, acts of war or terrorism;
• compliance with governmental and regulatory requirements, including the Dodd-Frank and Wall Street Consumer Protection Act
(“Dodd-Frank Act”) and other regulations relating to banking, consumer protection, securities and tax matters;
• changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary
and fiscal matters, including the policies of the Federal Reserve and as a result of initiatives of the current administration;
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• risks associated with our common stock; and
• those factors set forth below under the heading "Part I, Item 1A. Risk Factors," in this Annual Report on Form 10-K
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included
in this report. Because of these risks and other uncertainties, our actual future results, performance or achievements, or industry results, may
be materially different from the results indicated by the forward-looking statements in this report. In addition, our past results of operations
are not necessarily indicative of our future results. Accordingly, no forward-looking statements should be relied upon, which represent our
beliefs, assumptions and estimates only as of the dates on which such forward-looking statements were made. Any forward-looking
statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking
statement, whether as a result of new information, future developments or otherwise, except as required by law.
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CrossFirst Bankshares, Inc.
2021 Form 10-K Annual Report
Table of Contents
Part
Item
Number
Section
Page
Number
I
1
5
1A
16
1B
28
2
29
3
29
4
29
29
II
5
30
6
[Reserved]
7
32
7A
67
8
68
69
Consolidated Financial Statements and Related Notes
70
71
72
73
74
76
9
127
9A
127
9B
127
9C
III
10
127
11
128
12
128
13
129
14
129
IV
15
129
(a) (1) Financial Statements - See listing in Item 8 above
(a) (2) Financial Statement Schedules - None required
(a) (3) Exhibits
16
131
132
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Part I
ITEM 1. BUSINESS
Our Company
CrossFirst Bankshares, Inc., a Kansas corporation and registered bank holding company (the “Company”), is the holding company for
CrossFirst Bank (the “Bank”). The Company was initially formed as a limited liability company, CrossFirst Holdings, LLC, on September 1,
2008, to become the holding company for the Bank and converted to a corporation in 2017. The Bank was established as a Kansas state-
chartered bank in 2007 and provides a full suite of financial services to businesses, business owners, professionals, and their personal
networks through our eight offices located in Kansas, Missouri, Oklahoma, Texas , and Arizona.
Unless we state otherwise or the context otherwise requires, references in the below section to “we,” “our,” “us,” “ourselves,” “our
company,” and the “Company” refer to CrossFirst Bankshares, Inc., a Kansas corporation, its predecessors and its consolidated subsidiaries.
References to “CrossFirst Bank” and the “Bank” refer to CrossFirst Bank, a Kansas chartered bank and our wholly owned consolidated
subsidiary.
Since opening our first branch in 2007, we have grown organically primarily by establishing eight branches, attracting new clients and
expanding our relationships with existing clients, as well as through two strategic acquisitions. Since inception, our strategy has been to
build the most trusted bank serving our markets, which we believe has driven value for our shareholders. We are committed to a culture of
serving our clients and communities in extraordinary ways by providing personalized, relationship-based banking. We believe that success is
achieved through establishing and growing the trust of our clients, employees, shareholders, and communities. We remain focused on growth
and are equally focused on building stockholder value through greater efficiency and increased profitability. We intend to execute our
strategic plan through the following:
• Continue organic growth;
• Selectively pursue opportunities to expand through acquisitions or new market development;
• Improve financial performance;
• Attract, retain and develop talent;
• Maintain a branch-lite business model with strategically placed locations; and
• Leverage technology to enhance the client experience and improve profitability.
Developments during the Fiscal Year ended December 31, 2021
As a result of the COVID-19 pandemic, the Paycheck Protection Program (“PPP”) was established by the Coronavirus Aid, Relief,
and Economic Security (“CARES”) Act and authorized forgivable loans to small businesses. The Consolidated Appropriations Act of 2021
allocated an additional $284 billion in PPP funding that started in January of 2021. The Company provided an additional $134 million in PPP
funding during 2021. These PPP loans earn interest at 1%, include fees between 1% and 5%, and typically mature in five years. Additional
information related to the COVID-19 pandemic impact can be found in the “COVID-19 Pandemic Impact” section within Management’s
Discussion and Analysis.
The Company implemented its business continuity procedures in March 2020 that included having employees work from home or on
a rotation basis and meet with customers by appointment only. In April of 2021, substantially all employees returned to on-premises work
and the bank lobbies were re-opened to the public.
In January of 2021, the Company hired Jana Merfen to lead our enterprise technology strategies and services for the Bank. During the
year ended December 31, 2021, the Company continued to strengthen its technology strategy to enhance the digital experience for clients.
In April of 2021, the Company became a limited partner in a $150 million venture capital investment fund designed to help accelerate
technology adoption at community banks. The Company committed to a total investment of $3 million. The investment fund will help
community banks find solutions that make them more competitive and cost-efficient by identifying and investing in companies that solve
problems the community banks face.
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During the second quarter of 2021, Benjamin R. Clouse was named as the Company’s Chief Financial Officer effective, July 12, 2021,
to succeed David O’Toole.
In June of 2021, the Company announced that it was expanding its footprint with the opening of a branch in Phoenix, Arizona.
The Company completed its $20 million share repurchase program in June of 2021. A total of 1,573,806 common shares were
repurchased at an average per share price of $12.68.
In July of 2021, Jay Shadwick notified the Company of his decision to retire from the Company’s Board of Directors.
In October of 2021, the Company announced a new share repurchase program under which we may repurchase up to $30 million of
Company common stock. As of December 31, 2021, the Company had repurchased 566,164 common shares at an average per share price of
$14.75.
In December of 2021, the Company executed a contract to partner with Q2 to begin the implementation phase of providing a unified
digital platform for clients across all channels. The Q2 platform provides a responsive design with features and functionality parity between
online and mobile banking and gives the Company the ability to enhance our digital client experience with additional revenue generating
opportunities.
The Company is also in the process of transitioning our credit card services program in house, which will eliminate our utilization of a
third-party service provider. We anticipate the transition to be completed in 2022.
Products and Services
The Bank operates as a regional bank providing a broad offering of deposit and lending products to commercial and consumer clients.
The Bank’s branches are 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. We focus mainly on delivering products and services to small
and middle market commercial businesses and affluent consumers. We believe that this is a client segment that is underserved by larger bank
competitors.
We offer cash and treasury management solutions to our clients to help build and maintain our commercial relationships. We focus on
the following loan categories: (i) commercial loans, including enterprise value lending; (ii) commercial real estate loans; (iii) construction
and development loans, including home builder lending; (iv) 1-4 family real estate loans; (v) energy loans; and (vi) consumer loans.
We offer deposit banking products including: (i) personal and business checking and savings accounts; (ii) international banking
services; (iii) treasury management services; (iv) money market accounts; (v) certificates of deposits; (vi) negotiable order of withdrawal
accounts; (vii) automated teller machine access; and (viii) mobile banking.
Competition
The banking and financial services industry is highly competitive, and we compete with a wide range of financial institutions within
our markets, including local, regional and national commercial banks and credit unions. We also compete with mortgage companies, trust
companies, brokerage firms, consumer finance companies, securities firms, insurance companies, third-party payment processors, financial
technology (“Fintech”) companies, and other financial intermediaries. Some of our competitors are not subject to the regulatory restrictions
and level of regulatory supervision applicable to us.
Human Capital Resources
Employee Profile
As of December 31, 2021, the Company had 360 full-time equivalent employees in locations across the states of Kansas, Missouri,
Oklahoma, Texas and Arizona. As of December 31, 2021, approximately 59% of our current workforce is female, 41% male.
Compensation and Benefits Program
As part of our compensation philosophy, the Company offers and maintains competitive total rewards programs to attract and retain
superior talent throughout our market footprint. In addition to competitive base pay, additional programs include annual bonus opportunities,
long-term incentive opportunities, a Company augmented Employee Stock Ownership Plan, Company matched 401(k) Plan, healthcare and
insurance benefits, health savings and flexible spending accounts, paid time off, family leave, a Volunteer Time Off (“VTO”) program,
flexible work schedules, and employee assistance programs.
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Diversity and Inclusion
We believe that an equitable and inclusive environment with diverse teams supports our core values and strategic initiatives, and it is
crucial to our efforts to attract and retain key talent. We are focused on maintaining and enhancing our inclusive culture through our
CrossFirst Cares program and our IDEA Champions employee resource group. These groups enhance an inclusive culture through company
events, participation in our recruitment efforts, and input into our development strategies.
Our ongoing diversity and inclusion initiatives support our goal of engaging employees throughout the Company in creating an
inclusive workplace. We are focused on sourcing and hiring candidates with fair and equitable strategies and creating an environment where
all employees can develop and thrive.
Community Involvement
We build strong relationships within the communities we serve and support the passions of our employees. We encourage our
employees to volunteer their time and talent by serving on boards and supporting the communities where they live and work.
We understand that helping our employees devote their energies to causes that matter to them, to their communities and to those
individuals who are most in need makes a broader impact. Our CrossFirst Volunteer Time Off program provides paid leave for these
volunteer activities.
Our spirit of employee giving is also championed through our Generous Giving program. Through this program, we offer every
employee the opportunity to provide financial support for another individual by matching up to $500 per employee gift, per year. Our
Generous Giving is designed to give our employees additional resources to make a difference in people’s lives.
We focus on giving back to the communities we serve and providing opportunities to our employees to share in that effort. At the
same time, we recognize that participating in these activities enriches all our lives.
Health and Safety
The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health,
safety and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health
and welfare programs. This includes offering benefits to support their physical and mental well-being; providing tools and resources to help
improve or maintain their health status; and offering choices where possible for employees to customize their benefits to meet their needs and
the needs of their families. In response to the COVID-19 pandemic, the Company implemented significant operating environment changes
that leadership determined were in the best interest of our employees, the communities in which we operate, and which comply with
government regulations. This includes providing flexible work from home options for a large percentage of our employees, while
implementing additional safety measures for employees continuing critical on-site work.
Talent Development
We prioritize and invest in creating opportunities to help our employees grow and build their careers through a variety of training and
development programs. These include online, classroom and on-the-job learning formats paired with an individualized development
approach.
A core tenet of our talent system is to both develop talent from within and supplement with external candidates. This approach has
yielded loyalty and commitment in our employee base which benefits our business, our products, and our clients. In 2021, over 19% of our
current employees were promoted into roles with increased responsibilities. The addition of new employees and external ideas supports our
culture of continuous improvement and a diverse and inclusive workforce.
Our performance management framework includes monthly business and functional reviews, along with one-on-one and quarterly
forward-looking goal setting and development discussions, followed by annual opportunities for pay differentiation based on overall
employee performance distinction.
Supervision and Regulation
The following is a general summary of the material aspects of certain statutes and regulations that are applicable to us. These
summary descriptions are not complete. Please refer to the full text of the statutes, regulations, and corresponding guidance for more
information. These statutes and regulations are subject to change, and additional statutes, regulations, and corresponding guidance may be
adopted. We are unable to predict future changes or the effects, if any, that these changes could have on our business or our revenues.
8
General
We are extensively regulated under U.S. federal and state law. As a result, our growth and earnings performance may be affected not
only by management decisions and general economic conditions, but also by federal and state statutes and by the regulations and policies of
various bank regulatory agencies, including the Office of the State Bank Commissioner of Kansas, the Federal Reserve, the Federal Deposit
Insurance Corporation (“FDIC”) and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, tax laws administered by the
Internal Revenue Service (“IRS”) and state and local taxing authorities, accounting rules developed by the Financial Accounting Standards
Board (“FASB”), securities laws administered by the Securities and Exchange Commission (“SEC”) and state securities authorities and Anti-
Money Laundering (“AML”) laws enforced by the U.S. Department of the Treasury also impact our business. The effect of these statutes,
regulations, regulatory policies and rules are significant to our financial condition and results of operations. Further, the nature and extent of
future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation, and enforcement on the operations of
banks, their holding companies and their affiliates. These laws are intended primarily for the protection of depositors, clients and the Deposit
Insurance Fund of the FDIC (“DIF”) rather than for stockholders.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective
regulatory agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of
their businesses.
Regulatory Capital Requirements
The federal banking agencies require that banking organizations meet several risk-based capital adequacy requirements known as the
“Basel III Capital Rules.” The Basel III Capital Rules implement the Basel Committee’s December 2010 framework for strengthening
international capital standards and certain provisions of the Dodd -Frank Act.
The Basel III Capital Rules require the Company and the Bank to comply with four minimum capital standards: (i) a tier 1 leverage
ratio of at least 4.0%; (ii) a CET1 to risk-weighted assets of at least 4.5%; (iii) a tier 1 capital to risk-weighted assets of at least 6.0%; and (iv)
a total capital to risk-weighted assets of at least 8.0%. CET1 capital is generally comprised of common stockholders’ equity and retained
earnings subject to applicable regulatory adjustments. Tier 1 capital is generally comprised of CET1 and additional tier 1 capital. Additional
tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts
of consolidated subsidiaries. We are permitted to include qualifying trust preferred securities issued prior to May 19, 2010 as additional tier 1
capital. Total capital includes tier 1 capital (CET1 capital plus additional tier 1 capital) and tier 2 capital. Tier 2 capital is generally comprised
of capital instruments and related surplus meeting specified requirements, and may include cumulative preferred stock and long-term
perpetual preferred stock, mandatory convertible securities, intermediate preferred stock, and subordinated debt. Also included in tier 2
capital is the allowance for loan and lease losses (“ALLL”) limited to a maximum of 1.25% of risk-weighted assets. The calculation of all
types of regulatory capital is subject to deductions and adjustments specified in the regulations.
The Basel III Capital Rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital
requirements. The capital conservation buffer requirement was phased in beginning in January 2016 and is now fully implemented. An
institution is subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to
executive officers, if its capital level is below the buffered ratio.
The Basel III minimum capital ratios as applicable to the Bank and to the Company are summarized in the table below:
Basel III
Minimum For
Capital Adequacy
Purposes
Basel III
Additional
Capital
Conservation
Buffer
Basel III Ratio
With Capital
Conservation
Buffer
Total risk based capital (total capital to risk-weighted assets)
8.00%
2.50%
10.50%
Tier 1 risk based capital (tier 1 to risk-weighted assets)
6.00
2.50
8.50
Common equity tier 1 risk based capital (CET1 to risk-weighted assets)
4.50
2.50
7.00
Tier 1 leverage ratio (tier 1 to average assets)
4.00%
4.00%
In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, a banking organization’s assets,
including certain off-balance sheet assets are multiplied by a risk weight factor assigned by the regulations based on perceived risks inherent
in the type of asset. As a result, higher levels of capital are required for asset categories believed to present greater risk.
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As of December 31, 2021, the Company’s and the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage
requirements under the Basel III Capital Rules.
Prompt Corrective Action
The Federal Deposit Insurance Act requires federal banking agencies to take “prompt corrective action” with respect to depository
institutions that do not meet minimum capital requirements. For purposes of prompt corrective action, the law establishes five capital tiers:
“well-capitalized,” “adequately-capitalized,” “under-capitalized,” “significantly under-capitalized,” and “critically under-capitalized.” A
depository institution’s capital tier depends on its capital levels and certain other factors established by regulation. In order to be a “well-
capitalized” depository institution, a bank must maintain a CET1 risk-based capital ratio of 6.5% or more, a tier 1 risk-based capital ratio of
8% or more, a total risk-based capital ratio of 10% or more and a leverage ratio of 5% or more (and is not subject to any order or written
directive specifying any higher capital ratio). At each successively lower capital category, a bank is subject to increased restrictions on its
operations.
As of December 31, 2021, the Bank met the requirements for being deemed “well-capitalized” for purposes of the prompt corrective
action regulations and was not otherwise subject to any order or written directive specifying any higher capital ratios.
Enforcement Powers of Federal and State Banking Agencies
The federal banking regulatory agencies have broad enforcement powers, including the power to terminate deposit insurance, impose
substantial fines and other civil and criminal penalties, and appoint a conservator or receiver for financial institutions. Failure to comply with
applicable laws and regulations could subject us and our officers and directors to administrative sanctions and potentially substantial civil
money penalties.
The Company
General
As a bank holding company, the Company is subject to regulation and supervision by the Federal Reserve under the Bank Holding
Company Act of 1956, as amended (“BHCA”). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve.
The Company is required to file with the Federal Reserve periodic reports of its operations and such additional information as the Federal
Reserve may require.
Acquisitions, Activities and Change in Control
The BHCA generally requires the prior approval by the Federal Reserve for any merger involving a bank holding company or a bank
holding company’s acquisition of more than 5% of a class of voting securities of any additional bank or bank holding company or to acquire
all or substantially all the assets of any additional bank or bank holding company.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding
company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of
25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 5%
and 24.99% ownership.
Permitted Activities
The BHCA generally prohibits the Company from controlling or engaging in any business other than that of banking, managing and
controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the
Federal Reserve prior to November 11, 1999 to be “so closely related to banking as to be a proper incident thereto.”
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as
financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including
securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the
Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the
Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The Company has not elected to be a financial holding company, and
we have not engaged in any activities determined by the Federal Reserve to be financial in nature or incidental or complementary to activities
that are financial in nature.
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Source of Strength
Bank holding companies, such as the Company, are required by statute to serve as a source of financial strength for their subsidiary
depository institutions, by providing financial assistance to their insured depository institution subsidiaries in the event of financial distress.
Under the source of strength requirement, the Company could be required to provide financial assistance to the Bank should it experience
financial distress. Furthermore, the Federal Reserve has the right to order a bank holding company to terminate any activity that the Federal
Reserve believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank. The regulators may require these and
other actions in support of controlled banks even if such action is not in the best interests of the bank holding company or its stockholders.
Safe and Sound Banking Practices
Bank holding companies and their nonbanking subsidiaries are prohibited from engaging in activities that represent unsafe and
unsound banking practices or that constitute a violation of law or regulations. Under certain conditions the Federal Reserve may conclude
that certain actions of a bank holding company, such as a payment of a cash dividend, would constitute an unsafe and unsound banking
practice. The Federal Reserve also has the authority to regulate the debt of bank holding companies, including the authority to impose
interest rate ceilings and reserve requirements on such debt. Under certain circumstances the Federal Reserve may require a bank holding
company to file written notice and obtain its approval prior to purchasing or redeeming its equity securities, unless certain conditions are met.
Dividend Payments, Stock Redemptions and Repurchases
The Company’s ability to pay dividends to its stockholders is affected by both general corporate law considerations and the
regulations and policies of the Federal Reserve applicable to bank holding companies, including the Basel III Capital Rules. Generally, a
Kansas corporation may declare and pay dividends upon the shares of its capital stock either out of its surplus, as defined in and computed in
accordance with K.S.A. 17-6404 and 17-6604, and amendments thereto, or in case there is not any surplus, out of its net profits for the fiscal
year in which the dividend is declared or the preceding fiscal year, or both. If the capital of the corporation, computed in accordance with
K.S.A. 17-6404 and 17-6604, and amendments thereto, is diminished by depreciation in the value of its property, or by losses, or otherwise,
to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference
upon the distribution of assets, then no dividends may be paid out of such net profits until the deficiency in the amount of capital represented
by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
It is the Federal Reserve’s policy that bank holding companies should generally pay dividends on common stock only out of income
available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and
financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine
their ability to be a source of strength to its banking subsidiaries. Additionally, the Federal Reserve has indicated that bank holding
companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless
both asset quality and capital are very strong.
Bank holding companies must consult with the Federal Reserve before redeeming any equity or other capital instrument included in
tier 1 or tier 2 capital prior to stated maturity, if such redemption could have a material effect on the level or composition of the
organization’s capital base. In addition, bank holding companies are unable to repurchase shares equal to 10% or more of their net worth if
they would not be well-capitalized (as defined by the Federal Reserve) after giving effect to such repurchase. Bank holding companies
experiencing financial weaknesses, or that are at significant risk of developing financial weaknesses, must consult with the Federal Reserve
before redeeming or repurchasing common stock or other regulatory capital instruments.
Other Regulation
As a company whose stock is publicly traded, the Company is subject to various federal and state securities laws, including the
Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
Sarbanes-Oxley Act of 2002, and the Company files periodic reports with the Securities and Exchange Commission. In addition, because the
Company’s common stock is listed with The Nasdaq Stock Market LLC, the Company is subject to the listing rules of that exchange.
The Bank
General
The Bank is a Kansas state-chartered bank and is not a member bank of the Federal Reserve. As a Kansas state-chartered bank, the
Bank is subject to the examination, supervision and regulation by the Office of the State Bank Commissioner of Kansas (“OSBCK”), the
chartering authority for Kansas banks, and by the FDIC. The Bank is also subject to certain regulations of the CFPB.
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The OSBCK supervises and regulates all areas of the Bank’s operations including, without limitation, the making of loans, the
issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of capital adequacy requirements, the payment of
dividends, and the establishment or closing of banking offices. The FDIC is the Bank’s primary federal regulatory agency, and periodically
examines the Bank’s operations and financial condition and compliance with federal law. In addition, the Bank’s deposit accounts are insured
by the DIF to the maximum extent provided under federal law and FDIC regulations, and the FDIC has certain enforcement powers over the
Bank.
Depositor Preference
In the event of the ‘‘liquidation or other resolution’’ of an insured depository institution, the claims of depositors of the institution,
including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver,
will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured
depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors including the parent bank holding
company with respect to any extensions of credit they have made to that insured depository institution.
Brokered Deposit and Deposit Rate Restrictions
In December of 2020, the FDIC finalized revisions to its regulations relating to brokered deposits and interest rate restrictions that
apply to less than well-capitalized insured depository institutions. The final rule became effective April 1, 2021 and full compliance with the
revised brokered deposit regulation was extended to January 1, 2022.
Well-capitalized institutions are not subject to limitations on brokered deposits, while adequately-capitalized institutions are able to
accept, renew or roll over brokered deposits, only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such
deposits. Under-capitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits and are subject to a
deposit rate cap, pursuant to which the institutions would be prohibited from paying in excess of the higher of (1) 75 basis points above
published national deposit rates or (2) for maturity deposits, 120 percent of the current yield on similar maturity U.S. Treasury obligations
and, for non-maturity deposits, the federal funds rate plus 75 basis points, unless the FDIC determined that the institutions’ local market rate
was above the national rate. As of December 31, 2021, the Bank was eligible to accept brokered deposits without a waiver from the FDIC
and was not subject to the deposit rate cap.
Deposit Insurance
As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC. The FDIC has adopted a risk-
based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification. An
institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the
regulators. For deposit insurance assessment purposes, an insured depository institution is placed in one of four risk categories each quarter.
An institution’s assessment is determined by multiplying its assessment rate by its assessment base. The total base assessment rates range
from 1.5 basis points to 40 basis points. While in the past an insured depository institution’s assessment base was determined by its deposit
base, amendments to the Federal Deposit Insurance Act revised the assessment base so that it is calculated using average consolidated total
assets minus average tangible equity.
Additionally, the Dodd-Frank Act altered the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to
1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository
institutions when the reserve ratio exceeds certain thresholds. The FDIC had until September 3, 2020 to meet the 1.35% reserve ratio target,
but it announced in November 2018 that the DIF had reached 1.36%, exceeding the 1.35% reserve ratio target. At least semi-annually, the
FDIC updates its loss and income projections for the DIF and, if needed, may increase or decrease the assessment rates, following notice and
comment on proposed rule-making. However, as of June 30, 2020, the reserve ratio fell to 1.30%, below the statutory minimum of 1.35%.
On September 15, 2020, the FDIC adopted a Restoration Plan to restore the reserve ratio to at least 1.35% within eight years. The FDIC
projects that the reserve ratio will return to 1.35% without further action by the FDIC before the end of that eight-year period, but the FDIC
will closely monitor deposit balance trends, potential losses, and other factors that affect the reserve ratio. As a result, the Bank’s FDIC
deposit insurance premiums could increase or decrease. During the year ended December 31, 2021, the Bank paid $4 million in FDIC deposit
insurance premiums.
Audit Reports
Since the Bank is an insured depository institution with total assets of $1 billion or more, financial statements are prepared in
accordance with Generally Accepted Accounting Principles (“GAAP”), management’s certifications signed by the Company's and the Bank’s
chief executive officer and chief accounting or financial officer concerning management’s responsibility for the financial statements, and an
attestation by the auditors regarding the Bank’s internal controls must be submitted to the FDIC and OSBCK. The Federal Deposit Insurance
Corporation Improvement Act of 1991 requires that the Bank (or, as explained below, the Company) have an independent audit committee,
consisting of outside directors who are independent of management of the Company and the Bank. The audit committee must include at least
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two members with experience in banking or related financial management, must have access to outside counsel and must not include
representatives of large clients. Certain insured depository institutions with total assets of less than $5 billion, or $5 billion or more and a
composite CAMELS (i.e., capital adequacy, assets, management capability, earnings, liquidity, sensitivity) rating of 1 or 2, may satisfy these
audit committee requirements if its holding company has an audit committee that satisfies these requirements. The Company’s audit
committee satisfies these requirements.
Examination Assessments
Pursuant to the Kansas Banking Code, the expense of every regular examination, together with the expense of administering the
banking and savings and loan laws, including salaries, travel expenses, supplies and equipment are paid by the banks and savings and loan
associations of Kansas, which are generally allocated among them based on total asset size. During the year ended December 31, 2021, the
Bank paid examination assessments to the OSBCK totaling $685 thousand.
Capital Requirements
Banks are generally required to maintain minimum capital ratios. For a discussion of the capital requirements applicable to the Bank,
see “Regulatory Capital Requirements” above.
Bank Reserves
The Federal Reserve requires all depository institutions to maintain reserves against some transaction accounts (primarily Negotiable
Order of Withdrawal (“NOW”) and Super NOW checking accounts). The balances maintained to meet the reserve requirements imposed by
the Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal Reserve “discount window”
as a secondary source of funds if the institution meets the Federal Reserve’s credit standards. The Federal Reserve reduced the reserve
requirement to 0% effective March 26, 2020.
Dividend Payments
A primary source of funds for the Company is dividends from the Bank. The Bank is not permitted to pay a dividend to the Company
under certain circumstances, including if the Bank is under-capitalized under the prompt corrective action framework or if the Bank fails to
maintain the required capital conservation buffer. The Kansas Banking Code also places restrictions on the declaration of dividends by the
Bank to the Company. No dividend may be paid from the capital stock account of the Bank. The current dividends of the Bank may only be
paid from undivided profits after deducting losses. Before declaring any cash dividend from undivided profits, the Bank’s board of directors
must ensure that the surplus fund equals or exceeds the capital stock account. If the surplus fund is less than the capital stock account, the
Bank’s board of directors may transfer 25% of the net profits of the Bank, since the last preceding dividend from undivided profits, to the
surplus fund, except no additional transfers are required once the surplus fund equals or exceeds the capital stock account. Any other
dividend (whether in cash or other property) from the Bank to the Company requires the prior approval of the OSBCK.
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if,
following payment thereof, the institution would be under-capitalized. As described above, the Bank exceeded its minimum capital
requirements under applicable regulatory guidelines as of December 31, 2021.
Transactions with Affiliates
The Bank is subject to Sections 23A and 23B of the Federal Reserve Act (the “Affiliates Act”) and the Federal Reserve’s
implementation of Regulation W. An affiliate of a bank under the Affiliates Act is any company or entity that controls, is controlled by or is
under common control with the bank. Accordingly, transactions between the Company, the Bank and any nonbank subsidiaries will be
subject to a number of restrictions. The amount of loans or extensions of credit which the Bank may make to nonbank affiliates, or to third
parties secured by securities or obligations of the nonbank affiliates, are substantially limited by the Affiliates Act. Such acts further restrict
the range of permissible transactions between a bank and an affiliated company. A bank and its subsidiaries may engage in certain
transactions, including loans and purchases of assets, with an affiliated company only if the terms and conditions of the transaction, including
credit standards, are substantially the same as, or at least as favorable to the bank as, those prevailing at the time for comparable transactions
with non-affiliated companies or, in the absence of comparable transactions, on terms and conditions that would be offered to non-affiliated
companies.
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Loans to Directors, Executive Officers and Principal Stockholders
The authority of the Bank to extend credit to its directors, executive officers and principal stockholders, including their immediate
family members and corporations and other entities they control, is subject to substantial restrictions and requirements under the Federal
Reserve’s Regulation O, as well as the Sarbanes-Oxley Act.
Limits on Loans to One Borrower
As a Kansas state-chartered bank, the Bank is subject to limits on the amount of loans it can make to one borrower. With certain
limited exceptions, loans and extensions of credit from Kansas state-chartered banks outstanding to any borrower (including certain related
entities of the borrower) at any one time may not exceed 25% of the capital of the bank. Certain types of loans are exempt from the lending
limits, including loans fully secured by segregated deposits held by the bank or bonds or notes of the United States. A Kansas state-chartered
bank may lend an additional amount if the loan is fully secured by certain types of real estate. In addition to the single borrower limitation
described above, loans to a borrower and its subsidiaries generally may not exceed 50% of the capital of the bank. The Bank’s legal lending
limit to any one borrower was $170 million as of December 31, 2021.
Safety and Soundness Standards/Risk Management
The federal banking agencies have adopted guidelines establishing operational and managerial standards to promote the safety and
soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality
and earnings. In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is
responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in
the guidelines, the financial institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining
compliance. If a financial institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a
compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to
cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the financial institution’s rate of
growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to
take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and
desist orders and civil money penalty assessments.
Community Reinvestment Act (“CRA”)
The CRA is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs of
their communities. The CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions, to assess
their record of helping to meet the credit needs of their entire community, including low and moderate income neighborhoods, consistent
with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting its
community credit needs into account when evaluating applications for, among other things, domestic branches, consummating mergers or
acquisitions or holding company formations.
The federal banking agencies have adopted regulations which measure a bank’s compliance with its CRA obligations on a
performance based evaluation system. This system bases CRA ratings on an institution’s actual lending service and investment performance
rather than the extent to which the institution conducts needs assessments, documents community outreach or complies with other procedural
requirements. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” The Bank had a CRA rating of
“satisfactory” as of its most recent CRA assessment.
Anti-Money Laundering and the Office of Foreign Assets Control Regulation
The Company and the Bank must comply with the requirements of the Bank Secrecy Act (“BSA”). The BSA was enacted to prevent
banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from,
drug trafficking, money laundering, and other crimes. Since its passage, the BSA has been amended several times. These amendments
include the Money Laundering Control Act of 1986, which made money laundering a criminal act, as well as the Money Laundering
Suppression Act of 1994, which required regulators to develop enhanced examination procedures and increased examiner training to improve
the identification of money laundering schemes in financial institutions. The USA Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“PATRIOT Act”), substantially broadened the scope of U.S.
anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and
penalties and expanding the extra-territorial jurisdiction of the United States. The regulations impose obligations on financial institutions to
maintain appropriate policies, procedures and controls to detect, prevent, and report money laundering and terrorist financing. The
regulations include significant penalties for non-compliance. Likewise, Office of Foreign Assets Control (“OFAC”) administers and enforces
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economic and trade sanctions against targeted foreign countries and regimes under authority of various laws, including designated foreign
countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Financial institutions are responsible for,
among other things, blocking accounts of and transactions with such targets and countries, prohibiting unlicensed trade and financial
transactions with them and reporting blocked transactions after their occurrence. Failure of a financial institution to maintain and implement
adequate anti-money laundering and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and
reputational consequences for the institution.
Concentrations in Commercial Real Estate (“CRE”)
Concentration risk exists when financial institutions deploy too many assets to any one industry or segment. Concentration stemming
from CRE is one area of regulatory concern. The CRE Concentration Guidance, provides supervisory criteria, including the following
numerical indicators, to assist bank examiners in identifying banks with potentially significant CRE loan concentrations that may warrant
greater supervisory scrutiny: (i) CRE loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii)
construction and land development loans exceeding 100% of capital. The CRE Concentration Guidance does not limit banks’ levels of CRE
lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the
level and nature of their CRE concentrations. If a concentration is present, management must employ heightened risk management practices
that address the following key elements: (i) board and management oversight and strategic planning; (ii) portfolio management; (iii)
development of underwriting standards; (iv) risk assessment and monitoring through market analysis and stress testing; and (v) maintenance
of increased capital levels as needed to support the level of commercial real estate lending. On December 18, 2015, the federal banking
agencies jointly issued a ‘‘statement on prudent risk management for commercial real estate lending’’ reminding financial institutions of
developing risk management practices. See also “Risk Factors—We have a concentration in commercial real estate lending that could cause
our regulators to restrict our ability to grow” in this Form 10-K.
Consumer Financial Services
The Bank is subject to federal and state consumer protection statutes and regulations promulgated under those laws, including, without
limitation, regulations issued by the CFPB. These laws and regulations could increase or decrease the cost of doing business, limit or expand
permissible activities or affect the competitive balance among financial institutions.
Incentive Compensation Guidance
The federal bank regulatory agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies
of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The
incentive compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and
related risk management, control and governance processes. The incentive compensation guidance, which covers all employees that have the
ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles:
(i) balanced risk taking incentives; (ii) compatibility with effective controls and risk management; and (iii) strong corporate governance. Any
deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its
ability to make acquisitions or take other actions. In addition, under the incentive compensation guidance, a banking organization’s federal
supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness
of the organization. Further, the Basel III capital rules limit discretionary bonus payments to bank executives if the institution’s regulatory
capital ratios fail to exceed certain thresholds. Although the federal bank regulatory agencies proposed additional rules in 2016 related to
incentive compensation for all banks with more than $1 billion in assets, those rules have not yet been finalized. The scope and content of the
U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.
The Dodd-Frank Act requires public companies to include, at least once every three years, a separate non-binding ‘‘say-on-pay’’ vote
in their proxy statement by which stockholders may vote on the compensation of the public company’s named executive officers. In addition,
if such public companies are involved in a merger, acquisition, or consolidation, or if they propose to sell or dispose of all or substantially all
of their assets, stockholders have a right to an advisory vote on any golden parachute arrangements in connection with such transaction
(frequently referred to as ‘‘say-on-golden parachute’’ vote). Other provisions of the Dodd-Frank Act may impact our corporate governance.
For instance, the SEC adopted rules prohibiting the listing of any equity security of a company that does not have a compensation committee
consisting solely of independent directors, subject to certain exceptions. In addition, the Dodd-Frank Act requires the SEC to adopt rules
requiring all exchange-traded companies to adopt claw-back policies for incentive compensation paid to executive officers in the event of
accounting restatements based on material non-compliance with financial reporting requirements. Those rules, however, have not yet been
finalized. Additionally, the Company is an emerging growth company (“EGC”) under the Jumpstart Our Business Startups Act of 2012 (the
“JOBS Act”) and therefore subject to reduced disclosure requirements related to, among other things, executive compensation.
Financial Privacy
The federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial institutions to disclose non-
public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and,
15
in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. These regulations
affect how consumer information is transmitted through financial services companies and conveyed to outside vendors. In addition,
consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility
for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also
have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated
companies for the purpose of marketing products or services.
Impact of Monetary Policy
The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies
and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S.
government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank
deposits. These tools are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits,
and their use may affect interest rates charged on loans or paid on deposits.
New Banking Reform Legislation
Key provisions of the EGRRCPA as it relates to community banks and bank holding companies include, but are not limited to: (i)
designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain
documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading
liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations
for certain banks with less than $10 billion in assets as described above regarding the final rule for the community bank leverage ratio; (iv)
assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance
of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying
definitions pertaining to high-volatility commercial real estate, which require higher capital allocations, so that only loans with increased risk
are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from
institutions with under $1 billion in assets to institutions with under $3 billion in assets.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the Company, the Bank and the banking industry in general may be
proposed or introduced before the U.S. Congress, the Kansas Legislature and other governmental bodies in the future. Such proposals, if
enacted, may further alter the structure, regulation and competitive relationship among financial institutions, and may subject the Company
or the Bank to increased regulation, disclosure and reporting requirements. In addition, the various banking regulatory agencies often adopt
new rules and regulations to implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation
or regulations may be enacted or the extent to which the business of the Company or the Bank would be affected thereby.
Website Access to Company Reports
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to
those reports are available free of charge on the Company’s website at investors.crossfirstbankshares.com as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the SEC. In addition, copies of the Company’s annual report will be made
available, free of charge, upon written request. The Company does not intend for information contained in its website to be part of this annual
report on Form 10-K.
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ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially
affect our business, financial condition, results of operations or cash flows in future periods. While we believe we have identified and
discussed below the key risk factors affecting our business, there may be additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial that may adversely affect our business, financial condition, results of operations, cash flows or share
price in the future.
Risks Relating to Our Business and Market
The further spread of COVID-19 and its variants may adversely impact our business, financial condition and results of
operations in the short-term and for the foreseeable future.
business, financial condition and results of operations. Given the ongoing and dynamic nature of COVID-19 and its variants, the ultimate
effects on the broader economy and the markets in which we serve are highly uncertain and difficult to predict. Future impacts to our
business and customers could be widespread and material, such as increased unemployment, supply-chain interruptions; declines in demand
for loans and other banking services and products; reduction in business activity and financial transactions; increased commercial property
vacancy rates, declines in the value of loan collateral, including energy and real-estate collateral; declines in the credit quality of our loan
portfolio; volatile performance of our investment securities portfolio; and overall economic and financial market instability.
Actions taken by governmental and regulatory authorities in response to the pandemic have impacted, and may continue to impact, the
banking and financial services industries. In March 2020, the Federal Reserve lowered the Federal Funds rate, which may reduce our net
interest income and earnings. Additional regulation of the financial markets may be enacted in the future that could further impact our
business. We also participate in the Paycheck Protection Program, or PPP, a government lending program implemented to aid individuals
and businesses. Since the inception of the PPP, many banks have been subject to litigation related to agent fees and application processing.
As a result of our ongoing and future participation in the PPP and similar government stimulus and relief programs, we may experience
losses arising from fraud, litigation or regulatory action.
Any of the factors discussed above, taken together or in combination with other events or occurrences that may not yet be known or
anticipated, may materially and adversely affect our business, financial condition and results of operations. The further spread of the COVID-
19 outbreak, as well as ongoing or new governmental, regulatory and private sector responses to the pandemic, may materially disrupt
banking and other economic activity in the areas in which we operate. The ultimate impacts of the pandemic on our business, financial
condition and results of operations will depend on future developments and other factors that are highly uncertain and difficult to predict.
A decline in general business and economic conditions and any regulatory responses to such conditions could have a
material adverse effect on our business, financial position, results of operations and growth prospects.
Our business and operations, which primarily consist of lending money to clients in the form of loans and borrowing money from
clients in the form of deposits, are sensitive to general economic conditions, particularly in Kansas, Missouri, Oklahoma, Texas and Arizona.
Unfavorable or uncertain economic and market conditions may constrain our growth and profitability from our lending and deposit
operations, lead to credit quality concerns related to borrower repayment ability and collateral protection, and reduce demand for the
products and services we offer. Our business is also significantly affected by monetary and other regulatory policies, which are influenced by
macroeconomic conditions and other factors beyond our control. Uncertainty surrounding the federal fiscal policymaking process, the
medium and long-term fiscal outlook of the federal government and future tax rates are concerns for businesses, consumers and investors.
Adverse economic conditions and governmental policy responses to such conditions could have a material adverse effect on our business,
financial position, results of operations, and growth prospects.
Our profitability depends on interest rates generally, and we may be adversely affected by changes in market interest rates.
Our profitability depends in substantial part on our net interest income, which depends on many factors that are partly or completely
outside of our control, including competition, economic conditions and monetary and fiscal policies. Changes in interest rates could affect
our ability to originate loans and deposits, reduce the carrying value of assets on our balance sheet, reduce the value and marketability of loan
collateral, and create higher payment burdens for our borrowers (which may increase potential for default). Sustained periods of low interest
rates may cause us to experience net interest margin compression. The ratio of variable - to fixed-rate loans in our loan portfolio, the ratio of
short-term (maturing at a given time within 12 months) to long-term loans, and the ratio of our demand, money market and savings deposits
to certificates of deposit (and their time periods) are the primary factors affecting the sensitivity of our net interest income to changes in
market interest rates. Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may adversely
affect our financial condition, earnings and results of operation.
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We may not be able to implement aspects of our growth strategy, which may adversely affect our ability to maintain our
historical earnings trends.
We may not be able to sustain our growth at the rate we have enjoyed during the past several years, which has been driven primarily
by new market expansion, the strength of commercial and real estate lending in our market areas, and our ability to identify and attract high
caliber experienced banking talent. During the COVID-19 pandemic our growth was bolstered by government programs that may not
continue, such as PPP loans issued in 2020 and 2021. A downturn in local economic market conditions, our failure to attract and retain high
performing personnel, and the inability to attract core funding and quality lending clients, among other factors, could limit our ability to grow
as rapidly as we have in the past and may have a negative effect on our business, financial condition, and results of operations.
We may not be able to manage the risks associated with our anticipated growth and expansion through de novo branching,
mergers and acquisitions, new lines of business, or new offerings of services, products or product enhancements.
If our business continues to grow as anticipated, we may become more susceptible to risks related to both general growth and specific
areas of growth. Generally, risks are associated with attempting to maintain effective financial and operational controls as we grow, such as
maintaining appropriate loan underwriting and credit monitoring procedures, maintaining an adequate allowance for loan losses, controlling
concentrations and complying with regulatory or accounting requirements. Such risks may result in, among other effects, in increased loan
losses, reduced earnings, potential regulatory penalties and future restrictions on growth. We may also be exposed to certain risks associated
with the specific components of our growth strategy, as discussed in more detail below.
Expansion through De Novo Branching
: Our growth strategy includes evaluating opportunities to grow through de novo branching.
De novo branching carries with it certain potential risks, including significant startup costs and anticipated initial operating losses; an
inability to gain regulatory approval; an inability to hire or retain qualified senior management to successfully operate the branch and
integrate our corporate culture; challenges associated with securing attractive locations at a reasonable cost; poor market reception in
locations where we do not have a preexisting reputation; unfavorable local economic conditions; and the additional strain on management
resources and internal systems and controls. Failure to adequately manage any of the foregoing risks could have an adverse effect on our
business, financial condition and results of operations.
Mergers and Acquisitions
: As part of our growth strategy, we may pursue mergers and acquisitions of banks and nonbank financial
services companies within or outside our principal market areas. Mergers and acquisitions involve numerous risks associated with entry into
new markets or locations; integration and management of the combined entities; diversion of financial and management resources from
existing operations; assumption of unanticipated problems, such nonperforming loans and latent liabilities; unanticipated costs; and potential
future impairments to goodwill and other intangible assets. If we finance acquisitions by issuing convertible debt or equity securities, our
existing stockholders may be diluted, which could affect the market price of our common stock. As a condition to receiving regulatory
approval, we may also be required to sell banking locations, which may not be acceptable to us or may reduce the benefit of the acquisition.
The failure to obtain these regulatory approvals could impact our business plans and restrict our growth. Any one or more of these factors
could materially and adversely affect our business, financial condition and results of operations.
New Lines of Business, Services, Products or Product Enhancements
: From time to time, we may implement or acquire new lines
of business or offer new services, products or product enhancements. There are substantial risks and uncertainties associated with developing,
implementing and marketing such offerings, including significant investment of financial and other resources, inability to accurately predict
price and profitability targets, failure to realize expected benefits, regulatory compliance and shifting market preferences. These risks could
have a material adverse effect on our business, results of operations and financial condition.
Phase-out of the London Inter-Bank Offered Rate (“LIBOR”) and uncertainty relating to alternative reference rates may
adversely affect our results of operations.
LIBOR is used extensively as a reference rate for various financial contracts, including adjustable-rate loans, asset-backed securities,
and interest rate swaps. In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends
to stop persuading or compelling banks to submit LIBOR rates after 2021, such date was later extended to June 30, 2023. Accordingly,
continuation of LIBOR cannot be guaranteed after June 30, 2023 and alternative reference rates must be established.
Management is
currently evaluating the impact of this transition as it relates to new and existing contracts and customers. We will be required to implement
substitute indices for the calculation of interest rates under our loan agreements and we are currently evaluating appropriate alternatives to
LIBOR. Implementing the LIBOR phase-out will involve additional expense and may reduce the value of our LIBOR-based loans and
securities and impact the availability and cost of hedging instruments and borrowings. If we fail to successfully execute the transition, we
may be subject to disputes or litigation with clients over the appropriateness of substitute LIBOR indices. The ultimate impact of the LIBOR
phase-out on the valuations, pricing and operation of our financial instruments is not yet known and difficult to predict and may adversely
affect our results of operations. At December 31, 2021, $1.3 billion of our loans were tied to LIBOR.
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The fair value of our investment securities can fluctuate due to factors outside of our control.
As of December 31, 2021, 2020 and 2019, the fair value of our debt securities portfolio was approximately $746 million,
$655 million, and $739 million, respectively. Factors beyond our control can significantly influence the fair value of securities in our
portfolio and may cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating
agency actions, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and instability in the capital
markets. These and other factors could cause other-than-temporary impairments, realized or unrealized losses in future periods and declines
in other comprehensive income and the value of our common stock, any of which could materially and adversely affect our business, results
of operations, financial condition and prospects. Our inability to accurately predict the future performance of an issuer or to efficiently
respond to changing market conditions could result in a decline in the value of our investment securities portfolio, which could have an
adverse effect on our business, results of operations and financial condition.
We could suffer material credit losses if we do not appropriately manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of non-payment, risks
resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. There is
no assurance that our loan approval and credit risk monitoring procedures are or will be adequate to reduce the inherent risks associated with
lending. Our credit administration personnel and our policies and procedures may not adequately adapt to changes in economic or any other
conditions affecting clients and the quality of our loan portfolio, including any impacts of the continuing COVID-19 outbreak. Any failure to
manage such credit risks may materially adversely affect our business, financial condition, and results of operations.
We have credit exposure to the energy industry.
We have credit exposure to the energy industry in each of our primary markets and across the United States. A downturn or lack of
growth in the energy industry and energy-related business could adversely affect our business, financial condition, and results of operations.
Prolonged or further pricing pressure on oil and gas could lead to increased credit stress in our energy portfolio, increased losses associated
with our energy portfolio, increased utilization of our contractual obligations to extend credit, and weaker demand for energy lending. Such a
decline or general uncertainty resulting from continued volatility could have other adverse impacts that are difficult to isolate or quantify, all
of which could have an adverse effect on our business, financial condition and results of operations.
A concentration in commercial real estate lending could cause our regulators to restrict our ability to grow.
As a part of their regulatory oversight, the federal regulators have issued guidance on Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices (the “CRE Concentration Guidance”) with respect to a financial institution’s concentrations in
CRE lending activities. Such guidance identifies certain concentration levels that, if exceeded, will expose an institution to additional
supervisory analysis The guidelines identify the following as preliminary indications of possible CRE concentration risk: (i) the institution’s
total construction, land development and other land loans represent 100% or more of total capital and reserves; or (ii) total CRE loans as
defined in the guidance, or Regulatory CRE, represent 300% or more of the institution’s total capital and reserves, and the institution’s
Regulatory CRE has increased by 50% or more during the prior 36-month period. We believe that the CRE Concentration Guidance is
applicable to us. The FDIC or other federal regulators may become concerned about our CRE loan portfolio, and they could limit our ability
to grow by restricting approvals of new branches and other growth opportunities or by requiring us to raise additional capital, reduce our loan
concentrations or undertake other remedial actions.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
As of December 31, 2021, approximately 83% of our loan portfolio related to commercial-based lending. Commercial purpose loans
are often larger and involve greater risks than other types of lending. Repayment of these loans often depend on the successful operation or
development of the property or business involved and are highly sensitive to adverse conditions in the real estate market or the general
economy. Accordingly, a downturn in the real estate market or the general economy could impair the borrowers’ ability to repay and
heightens our risk related to commercial purpose loans, particularly CRE loans. Losses incurred on a small number of commercial purpose
loans could have a material adverse impact on our financial condition and results of operations due to the larger-than-average size of each
commercial purpose loan and collateral that is generally less readily-marketable.
Because a portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real
estate values could impair the value of collateral securing our real estate loans and result in loan and other losses.
Adverse changes affecting real estate values or operating cash flows of real estate, particularly in the markets in which we operate,
could increase the credit risk associated with our loan portfolio, and could result in losses that adversely affect credit quality and our financial
condition and results of operation. Market value of real estate can fluctuate significantly in a short period of time. Negative changes in the
economy affecting real estate values or operating cash flows in our market areas could significantly impair the value and marketability of
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property pledged loan collateral and may require us to increase our allowance for loan losses, any of which could have a material adverse
impact on our business, results of operations and growth prospects.
Our largest loan relationships make up a significant percentage of our total loan portfolio.
As of December 31, 2021, our 25 largest borrowing relationships totaled approximately $1 billion in total commitments (representing,
in the aggregate, 21% of our total outstanding commitments as of December 31, 2021). Our five largest borrowing relationships, based on
total commitments, accounted for 7% of total commitments as of December 31, 2021. This concentration of borrowers may expose us to
material losses if one or more of these relationships becomes delinquent or suffers default. The allowance for loan losses may not be
adequate to cover such losses, and any loss or increase in the allowance would negatively affect our earnings and capital. Even if these loans
are adequately collateralized, an increase in classified assets could harm our reputation with our regulators and inhibit our ability to execute
our business plan.
A portion of our loan portfolio is comprised of participation and syndicated transaction interests, which could have an
adverse effect on our ability to monitor the lending relationships and lead to an increased risk of loss.
As of December 31, 2021, we had $97 million of purchased loan participations from other financial institutions and a combination of
shared national credits and syndication interests purchased totaling $371 million. Although we comply with our general underwriting criteria
on these loan participations and syndicated loans, these loans may have a higher risk of loss than loans we originate and administer. In such
transactions in which we are not the lead lender, we rely in part on the lead lender or the agent, as the case may be, to monitor the
performance of the loan and provide information that we use to classify the loan and associated loan loss provisions. If our underwriting or
monitoring of these loans is not sufficient, our nonperforming loans may increase and our earnings may decrease.
Our levels of nonperforming assets could increase, which would adversely affect our results of operations and financial
condition, and could result in losses in the future.
As of December 31, 2021, our nonperforming loans (which consist of nonaccrual loans, loans past due 90 days or more and still
accruing interest and loans modified under troubled debt restructurings that are not performing in accordance with their modified terms)
totaled $32 million and our nonperforming assets (which include nonperforming loans plus other real estate owned) totaled $33 million.
However, we can give no assurance that our nonperforming assets will continue to remain at these levels and we may experience increases in
nonperforming assets in the future. Nonperforming assets adversely affect our management resources, net income, risk profile and capital
maintenance levels, efficiency ratio and returns on assets and equity, any of which may adversely affect our business, financial condition and
results of operation.
Our allowance may not be adequate to cover actual loan losses.
A significant source of risk arises from the possibility that we could sustain losses due to loan defaults and nonperformance on loans.
We maintain an allowance in accordance with GAAP to provide for such defaults and other nonperformance. As of December 31, 2021, our
allowance as a percentage of total loans was 1.37% and our allowance as a percentage of nonperforming loans was 185.19%. The amount of
future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates and the continuing
impact of the COVID-19 pandemic, many of which are beyond our control. Our underwriting policies, adherence to credit monitoring
processes and risk management systems and controls may not prevent unexpected losses. Our allowance may not be adequate to cover actual
loan losses. Moreover, any increase in our allowance will adversely affect our earnings by decreasing our net income.
Determining the appropriate level of allowance is an inherently difficult process based on numerous assumptions. In June 2016, the
Financial Accounting Standards Board issued ASU 2016-13,
Financial Instruments-Credit Losses
, which significantly altered the way the
allowance for credit losses is determined. The new Current Expected Credit Losses (“CECL”) model will become effective for us, on January
1, 2022, the implementation date. Under the new CECL model, we will be required to use historical information, current conditions and
reasonable forecasts to estimate the expected loss over the life of the loan.
Smaller commercial borrowers may have fewer resources, which may impair their ability to repay loans.
We have many small- to medium-sized business customers, which frequently have smaller market shares and fewer financial resources
(in terms of capital or borrowing capacity) than larger entities. Accordingly, these businesses may be more vulnerable to economic
downturns, often need substantial additional capital to expand or compete, and may experience substantial volatility in operating results, any
of which may impair a borrower’s ability to repay a loan. If these or other borrowers are harmed by adverse business conditions, our
business, financial condition and results of operations could be adversely affected.
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We rely on our senior management team and may have difficulty identifying, attracting and retaining necessary personnel,
which may divert resources and limit our ability to execute our business strategy and successfully grow our business.
Our continued growth and successful operation of our business depends, in large part, on our ability to hire and retain highly qualified
and motivated personnel at every level. Our senior management team has significant industry experience, and their knowledge and
relationships would be difficult to replace in the event of departure or retirement of senior managers. We must also hire and retain qualified
banking personnel to continue to grow our business. Competition for senior executives and skilled personnel in the financial services and
banking industry is significant, and costs associated with incenting and retaining skilled personnel may be material and continue to increase.
If we are unable to hire and retain qualified personnel or successfully address management succession issues, we may be unable to
successfully execute our business strategy and manage our growth, which could have a material adverse effect on our business, financial
condition or results of operations.
We rely on short-term funding, which can be adversely affected by local and general economic conditions.
As of December 31, 2021, approximately $4 billion, or 87%, of our deposits consisted of demand, savings, money market, and
transaction accounts (including negotiable order of withdrawal accounts). The approximately $1 billion remaining balance of deposits
consisted of certificates of deposit, of which approximately $538 million, or 11% of our total deposits, was due to mature within one year.
Based on our experience, we believe that our savings, money market and noninterest -bearing accounts are relatively stable sources of funds.
Our ability to attract and maintain deposits, as well as our cost of funds, has been, and will continue to be significantly affected by general
economic conditions. In addition, as market interest rates rise, we will have competitive pressure to increase the rates we pay on deposits. If
we increase interest rates paid to retain deposits, our earnings may be adversely affected.
Our largest deposit relationships currently make up a significant percentage of our deposits and the withdrawal of deposits
by our largest depositors could force us to fund our business through more expensive and less stable sources.
At December 31, 2021, our 30 largest depositors accounted for 29% of our total deposits and our five largest depositors accounted for
10% of our total deposits. Withdrawals of deposits by any one of our largest depositors or by one of our related client groups could force us
to rely more heavily on borrowings and other sources of funding to meet business and withdrawal demands, adversely affecting our net
interest margin and results of operations. Such circumstances may require us raise deposit rates to attract new deposits and rely more heavily
on other funding sources that could be more expensive and less stable. Under applicable regulations, if the Company was no longer “well-
capitalized,” we would be required to obtain FDIC approval to accept brokered deposits and could also be subject to a deposit rate cap
prohibiting us from paying in excess of 75 basis points above national deposit rates.
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due, and failure to
maintain sufficient liquidity could materially adversely affect our growth, business, profitability and financial condition.
Liquidity is essential to our business, sufficient levels of which are required to fund asset growth, serve client demand for loans, pay
our debt obligations, and meet other cash commitments. Liquidity risk is the potential that we will be unable to meet our obligations as they
come due because of an inability to liquidate assets or obtain adequate funding without adverse conditions or consequences. Liquidity risk
can increase due to a number of factors, including an over-reliance on a particular source of funding, market-wide phenomena such as market
dislocation and major disasters, and a high concentration of large depositors. The Bank’s primary funding source is client deposits. Other
sources of funding may include advances from the Federal Home Loan Bank (“FHLB”), the Federal Reserve Bank of Kansas City (“FRB”),
and our acquisition of brokered deposits, internet subscription certificates of deposit, and reciprocal deposits through the Intrafi Network.
Although the Bank has historically been able to replace maturing deposits and advances as necessary, it might not be able to replace such
funds in the future. An inability to raise funds through deposits, borrowings, the sale of loans, securities and other sources could have a
substantial negative effect on liquidity. Any substantial, unexpected or prolonged change in the level or cost of liquidity could have a material
adverse effect on our financial condition and results of operations, and could impair our ability to fund operations and meet our obligations as
they become due and could jeopardize our financial condition.
Our historical growth rate and performance may not be indicative of our future growth or financial results and our ability to
continue to grow is dependent upon our ability to effectively manage the increases in scale of our operations.
We may not be able to sustain our historical rate of growth or grow our business at all. Additionally, we may not be able to maintain
historical levels of expenses. Consequently, our historical results of operations will not necessarily be indicative of our future operations.
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We may not be able to maintain sufficient capital in the future, which may adversely affect our financial condition, liquidity,
results of operations, and our ability to maintain regulatory compliance.
Our business strategy calls for continued growth. We may need to raise additional capital in the future to support our continued
growth and to maintain our required regulatory capital levels. Our ability to raise additional capital depends on conditions in the capital
markets, economic conditions, and a number of other factors, including investor perceptions regarding the banking industry, market
conditions and governmental activities, our financial condition and performance, and competition with other financial institutions for capital
sources. We cannot guarantee that we will be able to raise additional capital in the future on acceptable terms, which may adversely affect our
liquidity, growth strategy, financial condition and results of operations.
We face strong competition from banks, credit unions, Financial Technology Company (“FinTech”) and other financial
services providers that offer banking services, which may limit our ability to attract and retain banking clients.
Competition in the banking industry generally, and in our primary markets specifically, is intense. Competitors include banks and
other financial services providers, such as savings and loan institutions, brokerage firms, credit unions, mortgage banks, and other financial
intermediaries. In particular, we compete with larger national and regional financial institutions, whose greater resources afford them many
competitive advantages. Such resources may enable our competitors to achieve larger economies of scale; offer more services; spend more
on advertising and technological investments; offer better lending rates to clients; better diversify their loan portfolio; and have less
vulnerability to downturns in local economies and real estate markets. If we are unable to offer competitive products and services as quickly
as our larger competitors, our business may be negatively affected. We also compete against community banks, credit unions and nonbank
financial services companies with strong local ties to small- and medium-sized businesses that we target, and we may be unable to attract and
retain such clients as effectively as these smaller competitors. Additionally, we face growing competition from so-called “online businesses”
with few or no physical locations, including financial technology companies, online banks, lenders and consumer and commercial lending
platforms, and automated retirement and investment service providers. New technology and other changes increasingly allow parties to
effectuate online financial transactions with little to no involvement from banks, including bill payment, funds transfers, and maintenance of
funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. The process of eliminating banks as
intermediaries, known as “disintermediation,” could reduce our income from fees and deposits. Ultimately, we may be unable to compete
successfully against current and future competitors, which may reduce our revenue stream and prevent us from growing our loan and deposit
portfolios, any of which may adversely affect our results of operations and financial condition.
Our risk management framework may not be effective in mitigating risks or losses to us, and we may incur losses due to
ineffective risk management processes and strategies.
Our risk management framework is comprised of various processes, systems and strategies designed to manage our risk exposure,
including credit, market, liquidity, interest rate, operational, reputation, business, and compliance risks. Our framework also includes
financial or other modeling methodologies that involve highly subjective management assumptions and judgment. Our risk management
framework may not be effective under all circumstances and may not adequately mitigate risks or losses, which could result in adverse
regulatory consequences and unexpected losses and our business, financial condition, results of operations or growth prospects could be
materially and adversely affected. We may also be subject to potentially adverse regulatory consequences.
We are required to make significant judgments, assumptions and estimates in the preparation of our financial statements and
our judgments, assumptions and estimates may not be accurate.
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions
and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting
policies, which are included in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that
we consider “critical” because they require judgments, assumptions, and estimates that materially affect our consolidated financial statements
and related disclosures. As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments,
assumptions, and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated
financial statements and related disclosures, in each case resulting in our need to revise or restate prior period financial statements, cause
damage to our reputation and the price of our common stock and adversely affect our business, financial condition and results of operations.
If we fail to maintain effective internal control over financial reporting, we may not be able to report accurate and timely
financial results, which may cause material harm to our business.
Our management team is responsible for establishing and maintaining adequate internal control over financial reporting and for
evaluating and reporting on that system of internal control. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with GAAP. As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public
22
companies. Unless we remain an EGC and elect additional transitional relief available to EGCs, our independent registered public accounting
firm may be required to report on the effectiveness of our internal control over financial reporting beginning as of that annual report on Form
10-K. We will continue to periodically test and update, as necessary, our internal control systems, including our financial reporting controls.
Our actions, however, may not be sufficient to result in an effective internal control environment, and any future failure to maintain effective
internal control over financial reporting could impair the reliability of our financial statements which in turn could harm our business, impair
investor confidence in the accuracy and completeness of our financial reports and our access to the capital markets, cause the price of our
common stock to decline and subject us to regulatory penalties.
Failure to keep pace with technological change could adversely affect our business.
Advances and changes in technology could significantly affect our business, financial condition, results of operations, and future
prospects. The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. Failure to successfully keep pace with technological change affecting our industry could harm our
ability to compete effectively. Many of our competitors have substantially greater resources to invest in technological improvements. We face
many challenges, including the increased demand to provide clients electronic access to their accounts and the cost and implementation of
systems to perform electronic banking transactions. Our ability to compete depends on our ability to continue to adapt technology on a timely
and cost-effective basis to meet these demands. We may not be able to effectively or timely implement new technology-driven products and
services or be successful in marketing these products and services to our clients. As these technologies are improved in the future, we may be
required to make significant capital expenditures in order to remain competitive, which may increase our overall expenses and have a
material adverse effect on our business, financial condition, results of operations and cash flows.
We are exposed to cybersecurity threats and potential security breaches, and our efforts to minimize or respond to such
threats may not be effective to prevent significant harm to the Company.
We conduct a portion of our business over the Internet. We rely heavily upon data processing, software, communications and
information systems from a number of third parties to conduct our business. Our business involves the storage and transmission of clients’
proprietary information and security breaches could expose us to a risk of loss or misuse of such information, litigation and potential liability.
Our operations are vulnerable to disruptions from human error, natural disasters, power loss, computer viruses, spam attacks, denial of
service attacks, unauthorized access, and other unforeseen events. Undiscovered data corruption could render our client information
inaccurate. Third-party or internal systems and networks may fail to operate properly or become disabled due to deliberate attacks or
unintentional events. Security breaches and cyberattacks may cause significant increases in operating costs, including the costs of
compensating clients for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and
strengthen the security of data processing and storage systems.
While we believe we are in compliance with all applicable privacy and data security laws, an incident could put our client
confidential information at risk and expose us to significant liability. We have been the target of data and cyber security attacks and may
experience attacks in the future. While we have not experienced a material cyber-incident or security breach that has been successful in
compromising our data or systems to date, we can never be certain that all of our systems are entirely free from vulnerability to breaches of
security or other technological difficulties or failures. The perpetual evolution of known cyber-threats requires us to devote significant
resources to maintain, regularly update and backup our data security systems and processes, as we may not be able to anticipate, or
effectively implement preventative measures against, all cyber-attacks. A security breach or other cyber-incident could have an adverse
impact on, among other things, our revenue, ability to attract and maintain clients and our reputation. In addition, a security breach could also
subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability, all of which could have a material
adverse effect on our business, financial condition and results of operati ons.
We rely on client, counterparty and third-party information, which subjects us to risks if that information is not accurate or
is incomplete.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we rely on information furnished
to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also rely on
representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements,
on reports of independent auditors. While we have a practice of seeking to independently verify client information that we use in deciding
whether to extend credit or to agree to a loan modification, including employment, assets, income and credit score, not all client information
is independently verified, and if any of the information that is independently verified (or any other information considered in the loan review
process) is misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower
than expected. Whether a misrepresentation is made by the applicant, another third party or one of our employees, we generally bear the risk
of loss associated with the misrepresentation. We may not detect all misrepresented information in our approval process. Any such
misrepresented information could adversely affect our business, financial condition and results of operations.
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We are subject to certain operating risks related to employee error and client, employee and third-party misconduct, which
could harm our reputation and business.
Employee error or employee and client misconduct could subject us to financial losses or regulatory sanctions and seriously harm our
reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf
of our clients or improper use of confidential information. It is not always possible to prevent employee error or misconduct, and the
precautions we take to prevent and detect this activity may not be effective in all cases. Because the nature of the financial services business
involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified.
Our necessary dependence upon processing systems to record and process transactions and our large transaction volume may further increase
the risk that employee errors, tampering or manipulation of those systems will result in losses that are difficult to detect. Employee error or
misconduct could also subject us to financial claims. If our internal control systems fail to prevent or detect an occurrence, it could have a
material adverse effect on our business, financial condition and results of operations.
Fraudulent activity could damage our reputation, disrupt our businesses, increase our costs and cause losses.
As a financial institution, we are inherently exposed to operational risk in the form of theft and other fraudulent activity by employees,
clients and other third parties targeting us and our clients or data. Such activity may take many forms, including check fraud, electronic fraud,
wire fraud, phishing, social engineering, and other dishonest acts. Although the Company devotes substantial resources to maintaining
effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, the
Company may experience financial losses or reputational harm as a result of fraud. In addition, we may be required to make significant
capital expenditures in order to modify and enhance our protective measures or to investigate and remediate fraudulent activity. Although we
have not experienced any material business or reputational harm as a result of fraudulent activities in the past, the occurrence of fraudulent
activity could damage our reputation, disrupt our business, increase our costs and cause losses in the future.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail
to comply with banking regulations.
We depend, to a significant extent, on a number of relationships with third-party service providers. Specifically, we receive core
systems processing, essential web hosting and other internet systems, loan and deposit processing, and other processing services from third-
party service providers. If these third-party service providers experience financial, operational or technological difficulties or terminate their
services and we are unable to replace them with other service providers, our operations could be interrupted. If an interruption were to
continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps
materially. Even if we are able to replace our service providers, it may be at a higher cost to us, which could adversely affect our business,
financial condition and results of operations.
We follow a relationship-based operating model and negative public opinion could damage our reputation and adversely
impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative public opinion, is inherent in our business. Negative
public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance
and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. Negative
public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action
and adversely affect our results of operations. Although we take steps to minimize reputation risk in dealing with our clients and
communities, this risk will always be present given the nature of our business.
If third parties infringe upon our intellectual property or if we were to infringe upon the intellectual property of third parties,
we may expend significant resources enforcing or defending our rights or suffer competitive injury.
We rely on a combination of copyright, trademark, trade secret laws, and confidentiality provisions to establish and protect our
intellectual property rights. If we fail to successfully maintain, protect and enforce our intellectual property rights, our competitive position
could suffer. Similarly, if we were to infringe on the intellectual property rights of others, our competitive position could suffer. Third parties
may challenge, invalidate, circumvent, infringe or misappropriate our intellectual property, or such intellectual property may not be sufficient
to permit us to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly redesign
efforts, discontinuance of certain product or service offerings or other competitive harm.
We may also be required to spend significant resources to monitor and police our intellectual property rights. Some of our competitors
may independently develop similar technology, duplicate our products or services or design around our intellectual property, and in such
cases we may not be able to assert our intellectual property rights against such parties. Further, our contractual arrangements may not
effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our
confidential or proprietary information. We may have to litigate to enforce or determine the scope and enforceability of our intellectual
24
property rights, trade secrets and know-how, which could be time-consuming and expensive, could cause a diversion of resources and may
not prove successful. The loss of intellectual property protection or the inability to obtain rights with respect to third-party intellectual
property could harm our business and ability to compete. In addition, because of the rapid pace of technological change in our industry,
aspects of our business and our products and services rely on technologies developed or licensed by third parties, and we may not be able to
obtain or continue to obtain licenses and technologies from these third parties on reasonable terms or at all.
We may be exposed to risk of environmental liabilities or failure to comply with regulatory requirements with respect to
properties to which we take title.
In the course of our business, we may foreclose and take title to real estate, and these properties could subject us to environmental
liabilities and other federal, state or local regulatory requirements, such as the Americans with Disabilities Act. We do not know whether
existing requirements will change or whether compliance with future requirements will involve significant expenditures. We may be held
liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with these investigation or remediation activities could be substantial. In addition, if we
are the owner or former owner of a contaminated site, we may be subject to claims and damages from third parties related to environmental
contamination emanating from the property. If we ever become subject to significant environmental liabilities or costs or fail to comply with
regulatory requirements with respect to these properties, our business, financial condition, liquidity and results of operations could be
materially and adversely affected.
The costs and effects of litigation, investigations or similar matters, or adverse facts and developments related thereto, could
materially affect our business, operating results and financial condition.
We may be involved from time to time in a variety of litigation, investigations or similar matters arising out of our business. It is
inherently difficult to assess the outcome of these matters, and we may not prevail in proceedings or litigation. Insurance may not cover all
such claims or losses, our indemnification rights may not be honored, and we may suffer damage to our reputation, regardless of the merit or
eventual outcome of a claim. The ultimate judgments or settlements in any litigation or investigation could have a material adverse effect on
our business, financial condition and results of operations. In addition, premiums for insurance covering the financial and banking sectors are
rising. We may not be able to obtain appropriate types or levels of insurance in the future, nor may we be able to obtain adequate replacement
policies with acceptable terms or at historic rates, if at all.
Financial counterparties expose the Company to risks.
We maintain correspondent bank relationships, manage certain loan participations, engage in securities transactions and engage in
other activities with financial counterparties that are customary to our industry. Many of these transactions expose us to counterparty credit,
liquidity and/or reputational risk in the event of default by the counterparty, negative publicity, and complaints about the counterparty or the
financial services industry in general. Although we seek to manage these risks through internal controls and procedures, we may experience
loss or interruption of business, damage to our reputation, or incur additional costs or liabilities as a result of unforeseen events with these
counterparties. Any financial cost, liability or reputational damage could have a material adverse effect on our business, which in turn, could
have a material adverse effect on our financial condition and results of operations.
Severe weather, natural disasters, pandemics, and other external events could significantly impact our business.
Severe weather, including tornadoes, droughts, hailstorms and other natural disasters, pandemics, such as the recent outbreak of
COVID-19, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business.
Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of
collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. Operations in
our markets could be disrupted by both the evacuation of large portions of the population as well as damage or lack of access to our banking
and operation facilities. Other severe weather or natural disasters, pandemics, acts of war or terrorism or other adverse external events may
occur in the future. Although management has established business continuity plans and procedures, the occurrence of any such events could
have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to Our Regulatory Environment
We are subject to extensive regulation, which increases the cost and expense of compliance and could limit or restrict our
activities, which in turn may adversely impact our earnings and ability to grow.
We operate in a highly regulated environment and are subject to regulation, supervision and examination by a number of governmental
regulatory agencies, including, with respect to the Bank, the FDIC and the OSBCK and, with respect to the Company, the Federal Reserve.
Regulations adopted by these agencies govern a comprehensive range of matters relating to ownership and control of our shares, our
25
acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels, dividend
payments and other aspects of our operations. Bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or
violations of law. If, as a result of an examination, a banking agency determines that an aspect of our operations were unsatisfactory, or that
we were, or our management was, in violation of any law or regulation, they may take a number of different remedial actions as they deem
appropriate. These actions include the power to enjoin ‘‘unsafe or unsound’’ practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to
restrict our growth, to assess civil money penalties against us, our officers or directors, to fine or remove officers and directors and, if it is
concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s FDIC deposit
insurance and place the Bank into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on
our business, financial condition and results of operations.
Government policy, legislation and regulation, particularly monetary policy from the Federal Reserve, significantly affect economic
growth and financial operations, including our distribution of credit, bank loans, investments, deposits, product offerings and disclosures,
interest rates and bankruptcy proceedings for consumer residential real estate mortgages. The laws and regulations applicable to the banking
industry could change at any time and we cannot predict the effects of these changes on our business, profitability or growth strategy.
Increased regulation could increase our cost of compliance, adversely affect profitability and inhibit our ability to conduct business consistent
with historical performance. If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits or material
restrictions on our businesses and growth that may damage our reputation and adversely affect our business operations. Proposed legislative
and regulatory actions may not occur within expected time frames, or at all, which creates additional uncertainty for our business and
industry. Accordingly, legislative and regulatory actions taken now or in the future could have a material adverse impact our business,
financial condition and results of operation.
Many of our expansion and growth plans require regulatory approvals, and failure to obtain them may restrict our growth.
As part of our growth strategy, we may expand our business by pursuing strategic acquisitions of financial institutions, adding
branches and other complementary businesses. Generally, we must receive federal and state regulatory approval before we can acquire an
FDIC-insured depository institution or related business. In determining whether to approve a proposed acquisition, federal and state banking
regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects and
the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios, the competence,
experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the
communities to be served and the effectiveness of the acquiring institution in combating money laundering activities.
The Federal Reserve may require the Company to commit capital resources to support the Bank.
As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to
its subsidiary banks. The Federal Reserve may charge the bank holding company with engaging in unsafe and unsound practices for failure
to adequately commit resources to a subsidiary bank. Accordingly, we may be required to make capital injections into a troubled subsidiary
bank, even if such contribution creates a detriment to the Company or its stockholders. If we do not have sufficient resources on hand to fund
the capital injection, we may be required borrow funds or raise capital. Any such loans are subordinate in right of payment to deposits and to
certain indebtedness of the subsidiary bank. In the event of bankruptcy of the bank holding company, claims based upon any commitments to
fund capital injections are entitled to a priority of payment over claims made by general unsecured creditors, including holders of
indebtedness. Thus, any borrowing incurred by the Company to make required capital injections to the Bank are difficult and expensive, and
will adversely impact our financial condition, results of operations and future prospects. Additionally, under the Financial Institutions Reform
Recovery and Enforcement Act of 1989 (“FIRREA”), losses caused by a failing bank subsidiary might be charged to the capital of an affiliate
bank. Moreover, any bank operating under the Company’s common control may also be required to contribute capital to a failing affiliate
bank within the Company’s control group. This is known as FIRREA’s “cross-guarantee” provision. The Company currently has one bank
subsidiary.
The Company and the Bank are subject to stringent capital requirements that may limit our operations and potential growth.
The Company and the Bank are subject to various regulatory capital requirements. Failure to meet minimum capital requirements will
result in certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet commitments as
calculated under these regulations. In order to be a “well-capitalized” depository institution under prompt corrective action standards (but
without taking into account the capital conservation buffer requirement described below), a bank must maintain a CET1 risk-based capital
ratio of 6.5% or more, a tier 1 risk-based capital ratio of 8.0% or more, a total risk-based capital ratio of 10.0% or more and a leverage ratio
of 5.0% or more (and is not subject to any order or written directive specifying any higher capital ratio). The failure to meet the established
capital requirements under the prompt corrective action framework could result in one or more of our regulators placing limitations or
conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and such failure could
subject us to a variety of enforcement remedies available to the federal regulatory authorities, including limiting our ability to pay dividends,
26
issuing a directive to increase our capital and terminating the Bank’s FDIC deposit insurance, which is critical to the continued operation of
the Bank.
Due to the completed phase-in of a capital conservation buffer requirement, the Company and the Bank must effectively maintain a
CET1 capital ratio of 7.0% or more, a tier 1 risk-based capital ratio of 8.5% or more, a total risk-based capital ratio of 10.5% or more and, for
the Bank, a leverage ratio of 5.0% or more and for the Company, a leverage ratio of 4.0% or more. Many factors affect the calculation of our
risk-based assets and our ability to maintain the level of capital required to achieve acceptable capital ratios, such as increases to our risk-
weighted assets, loan impairments, loan losses exceeding the amount reserved for such losses and other factors that decrease our capital,
thereby reducing the level of the applicable ratios. Our failure to remain well-capitalized could affect client and investor confidence, our
ability to grow, our costs of funds, the interest rates that we pay on deposits, FDIC insurance costs, our ability to pay dividends on common
stock, our ability to make acquisitions, and our business, results of operations and financial condition.
Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
Our deposits are insured up to applicable limits by the DIF and are subject to deposit insurance assessments to maintain deposit
insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the FDIC. Although
we cannot predict what the insurance assessment rates will be in the future, either a deterioration in our risk-based capital ratios or
adjustments to the base assessment rates could have a material adverse impact on our business, financial condition, results of operations and
cash flows.
We face a risk of noncompliance and enforcement action with respect to the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
The BSA, the PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and maintain
an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. Violation
of such requirements may result in significant civil money penalties imposed by federal banking agencies and Financial Crimes Enforcement
Network, which agencies have recently engaged in coordinated enforcement efforts against banks and other financial services providers with
the U.S. Department of Justice (“DOJ”), the Drug Enforcement Administration and the IRS. We are also subject to increased scrutiny of
compliance with the rules enforced by the OFAC, which may require sanctions for dealing with certain persons or countries. If the policies,
procedures and systems of our company, or any of our subsidiaries, are deemed deficient, we would be subject to fines and regulatory
actions, which may include restrictions on our ability to pay dividends and requirements to obtain regulatory approvals to proceed with
certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money
laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material
adverse effect on our business, financial condition, results of operations and growth prospects.
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we
collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements concerning security breach
notification, and we could be negatively impacted by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act which,
among other things: (i) imposes certain limitations on our ability to share non-public personal information about our clients with non-
affiliated third parties; (ii) requires that we provide certain disclosures to clients about our information collection, sharing and security
practices and afford clients the right to “opt out” of any information sharing by us with non-affiliated third parties (with certain exceptions);
and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing safeguards that
are appropriate based on our size and complexity, the nature and scope of our activities and the sensitivity of client information we process,
as well as plans for responding to data security breaches. Many state and federal banking regulators, states and foreign countries have also
enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement
notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States and other
countries are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant
impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention
and safeguarding of client or employee information, and some of our current or planned business activities. This could also increase our costs
of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related
enforcement activity at the federal level by the Federal Trade Commission, as well as at the state level.
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach
notification) affecting client or employee data to which we are subject could result in higher compliance and technology costs and could
restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial conditions
or results of operations. Our failure to comply with privacy, data protection and information security laws could result in potentially
significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a
material adverse effect on our business, financial condition or results of operations.
27
Under the terms of the CRA, each appropriate federal bank regulatory agency is required, in connection with its examination of a
bank, to assess such bank’s record in assessing and meeting the credit needs of the communities served by that bank, including low- and
moderate-income neighborhoods. During these examinations, the regulatory agency rates such bank’s compliance with the CRA as
“Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” The Bank had a CRA rating of “Satisfactory” as of its
most recent CRA assessment. The regulatory agency’s assessment of an institution’s record is part of the regulatory agency’s consideration of
applications to acquire, merge or consolidate with another banking institution or its holding company, or to open or relocate a branch office.
As we accept additional deposits in new geographic markets, we will be required to maintain an acceptable CRA rating, which may be
difficult.
We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to
comply with these laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose
nondiscriminatory lending requirements on financial institutions. The U.S. Department of Justice and other federal agencies are responsible
for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending
laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions
on mergers and acquisitions activity, restrictions on expansion and restrictions on entering new business lines. Private parties may also have
the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a
material adverse effect on our business, financial condition, results of operations and future prospects. We may be subject to liability for
potential violations of predatory lending laws, which could adversely impact our results of operations, financial condition and business.
Risks Related to Our Common Stock
The price of our common stock could be volatile.
The market price of our common stock may be volatile and could be subject to wide price fluctuations in response to various
factors, some of which are beyond our control. These factors include, among other things, actual or anticipated variations in our quarterly or
annual results of operations; recommendations by securities analysts; operating performance or fluctuations in the stock price performance of
other companies that investors deem comparable to us; news reports relating to trends, concerns and other issues in the financial services
industry generally; conditions in the banking industry such as credit quality and monetary policies; domestic and international economic
factors unrelated to our performance; perceptions, general market conditions and, in particular, developments related to market conditions for
the financial services industry; loss of investor confidence in the market for stocks; new technology used, or services offered, by competitors;
loss of investor confidence and changes in government regulations. If any of the foregoing occurs, it could cause our stock price to fall and
may expose us to lawsuits that, even if unsuccessful, could be costly to defend and be a distraction to management.
Kansas law and the provisions of our articles of incorporation and bylaws may have an anti-takeover effect, and there are
substantial regulatory limitations on changes of control of bank holding companies.
Kansas corporate law and provisions of our articles of incorporation and our bylaws could make it more difficult for a third party to
acquire us, even if doing so would be perceived to be beneficial by our stockholders. Furthermore, with certain limited exceptions, federal
regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more
than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the
election of a majority of our directors or otherwise direct the management or policies of our Company without prior notice or application to
and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if
applicable, in connection with any purchase of shares of our common stock. Collectively, provisions of our articles of incorporation and
bylaws and other statutory and regulatory provisions may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other
transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. Moreover, the
combination of these provisions effectively inhibits certain business combinations, which, in turn, could adversely affect the market price of
our common stock.
Future equity issuances could result in dilution, which could cause the price of our shares of common stock to decline.
We are generally not restricted from issuing additional shares of stock, up to the 200,000,000 shares of voting common stock and
5,000,000 shares of preferred stock authorized in our articles of incorporation. In addition, we may issue additional shares of our common
stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or debt, upon exercise of
warrants or in connection with future acquisitions or financings. If we choose to issue additional shares of our common stock, or securities
28
convertible into shares of our common stock, for any reason, the issuance would have a dilutive effect on the holders of our common stock
and could have a material negative effect on the market price of our common stock.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or
could otherwise adversely affect holders of our common stock.
Our articles of incorporation authorize us to issue up to 5,000,000 shares of one or more series of preferred stock. Our Board of
Directors has the power to set the terms of any series of preferred stock that may be issued, including voting rights, dividend rights,
conversion rights, preferences over our voting common stock with respect to dividends or in the event of a dissolution, liquidation or winding
up and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to payment of dividends
or upon our liquidation, dissolution or winding up, the rights of the holders of our common stock or the market price of our common stock
could be adversely affected.
Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.
Holders of our common stock are entitled to receive only such dividends as our Board of Directors may declare out of funds legally
available for such payments. The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in
relation to the organization’s overall asset quality, current and prospective earnings, and capital level, composition and quality. Furthermore,
the Federal Reserve may prohibit payment of dividends that are deemed unsafe or unsound practice. Accordingly, any declaration and
payment of dividends on our common stock will depend upon many factors, including our earnings and financial condition, liquidity and
capital requirements, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common
stock, our capital management policies and strategic plans; our growth initiatives; and other factors deemed relevant by our Board of
Directors. Any such factor could adversely affect the amount of dividends, if any, paid to our common stockholders. If declared, dividends
will be payable to the holders of shares of our common stock on a pro rata basis in accordance with their shares held. If preferred shares are
issued, such shares may be entitled to priority over the common shares as to dividends. Other than the stock dividend provided to our
stockholders pursuant to our two-for-one stock split in 2018, we have no history of paying dividends to holders of our common stock.
We are a bank holding company and our only source of cash, other than further issuances of securities, is distributions from
our wholly-owned subsidiaries.
We are a bank holding company with no material activities other than activities incidental to holding the common stock of the Bank.
Our principal source of funds to pay distributions on our common stock and service any of our obligations, other than further issuances of
securities, would be dividends received from our wholly-owned subsidiaries. Furthermore, our wholly-owned subsidiaries are not obligated
to pay dividends to us, and any dividends paid to us would depend on the earnings or financial condition of our wholly-owned subsidiaries
and various business considerations. As is the case with all financial institutions, the profitability of our wholly-owned subsidiaries is subject
to the fluctuating cost and availability of money, changes in interest rates and economic conditions in general. In addition, various federal and
state statutes limit the amount of dividends that our wholly-owned subsidiaries may pay to the Company without regulatory approval.
As an emerging growth company, or EGC, we utilize certain exemptions from disclosure requirements which could make our
shares less attractive to investors and make it more difficult to compare our performance with other public companies.
As an “emerging growth company”, we may take advantage of certain exemptions from various reporting requirements including, but
not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and
reduced disclosure obligations regarding executive compensation. In addition, as an emerging growth company we are not required to
comply with new or revised financial accounting standards until private companies are required to comply, and we have not opted out of this
extended transition period. When a standard is issued or revised and it has different application dates for public or private companies, we can
adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our
financial statements with another public company which is neither an emerging growth company nor an emerging growth company which
has opted out of the extended transition period difficult or impossible because of the potential differences in accounting standards used. If
some investors find our shares less attractive as a result of our reliance on these exemptions, the trading prices of our shares may be lower
than they otherwise would be.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
29
ITEM 2. PROPERTIES
Our headquarters is located at 11440 Tomahawk Creek Parkway, Leawood, Kansas. Including our headquarters building, we operate
nine full-service banking centers located in: Leawood, Kansas; Wichita, Kansas; Kansas City, Missouri; Oklahoma City, Oklahoma; Tulsa,
Oklahoma; Dallas, Texas; Frisco, Texas; and Phoenix, Arizona. We own our headquarters building, our banking centers in Wichita, Kansas,
and Oklahoma City, Oklahoma and we lease the remainder of our locations. In addition, the Company signed a second lease agreement in
Dallas, Texas. We anticipate the additional location will be open to our customers in 2022. We believe that the leases to which we are subject
are generally on terms consistent with prevailing market terms. We also believe that our facilities are in good condition and are adequate to
meet our operating needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company or the Bank is a party to claims and legal proceedings arising in the ordinary course of business.
Management does not believe any present litigation or the resolution thereof will have a material adverse effect on the business, consolidated
financial condition or results of operations of the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following table sets forth certain information regarding our executive officers and the executive officers of the Bank, including
their names, ages and positions:
Name
Age as of March 1, 2022
Position(s)
Michael J. Maddox
52
President and Chief Executive Officer of the Company
Benjamin R. Clouse
48
Chief Financial Officer of the Company and the Bank
Steve Peterson
57
Chief Banking Officer of the Bank
W. Randall Rapp
57
Chief Risk and Chief Credit Officer of the Bank
Amy Fauss
54
Chief Operating Officer of the Bank
Jana Merfen
40
Chief Technology Officer of the Bank
Michael J. Maddox
—Mr. Maddox has served as President and Chief Executive Officer of the Company since June 1, 2020, and as
President and Chief Executive Officer of the Bank since November 28, 2008. Prior to joining the Bank, he was a Regional President for
Intrust Bank. In this role, he managed the bank’s operations in Northeast Kansas. Mr. Maddox has over 20 years of banking experience. Mr.
Maddox attended the University of Kansas from which he received a Business degree in 1991 and a law degree in 1994. While at KU, Mr.
Maddox was a four-year basketball letterman and a member of the KU team that won the National Championship in 1988. Mr. Maddox
completed the Graduate School of Banking at the University of Wisconsin - Madison in 2003. Mr. Maddox is a member of the Economic
Development Board of Johnson County. Mr. Maddox serves on the Kansas City Civic Council. He has served on the board of CrossFirst
Bank since 2008.
Benjamin R. Clouse
—Mr. Clouse was appointed as Chief Financial Officer effective July 12, 2021.
Mr. Clouse previously served as
Chief Financial Officer of Waddell & Reed Financial, Inc., a financial services firm, from 2018 until its acquisition in 2021. Previously, Mr.
Clouse served at that company as Vice President and Chief Accounting Officer from February 2017 to February 2018, Vice President and
Principal Accounting Officer from March 2016 to February 2017 and Vice President from October 2015 until March 2016. Prior thereto, Mr.
Clouse served as Chief Financial Officer of Executive AirShare Corporation, a private aviation company, from September 2012 to October
2015. From 2006 to 2012 and from 2002 to 2005, he served in various roles with H&R Block, Inc., a tax preparation company in Kansas
City, Missouri, including Assistant Vice President — Audit Services and Assistant Vice President and Controller — Tax Services. From 2005
to 2006, Mr. Clouse served as Vice President — Finance and Corporate Controller of Gold Bank Corporation, Inc., a bank holding company.
From September 1996 to January 2002, he served in various roles in the audit practice of Deloitte.
Steve Peterson
—Mr. Peterson became Chief Banking Officer of the Bank effective on July 1, 2020. Prior to this role, Mr. Peterson
served as the Wichita Bank President since August 2011. Prior to joining CrossFirst Bank, Mr. Peterson served as Division President of
Stillwater National Bank from 2004 to August 2011.
30
W. Randall Rapp
—Mr. Rapp has served as the Chief Credit Officer of the Bank since April 2019. Prior to joining the Bank, Mr. Rapp
held various positions at Texas Capital Bank, N.A. from March 2000 until March 2019, including serving as Executive Vice President and
Chief Credit Officer from May 2015 until March 2019, and as a Senior Credit Officer from 2013 until May 2015.
Amy Fauss
—Ms. Fauss has served as the Chief Operating Officer of the Bank since December 2009. She previously served as
Executive Vice President and Chief Operating Officer of Solutions Bank, where she directed all aspects of daily operations. Her experience
also includes senior management positions at Hillcrest Bank and Citizens-Jackson County Bank.
Jana Merfen
—Ms. Merfen joined CrossFirst Bank in January 2021. Prior to that she served as Chief Information Officer of
Dickinson Financial Corp. and Academy Bank from April 2017 to January 2021. Prior to working at Dickinson Financial Corp. and
Academy Bank, she worked at CommunityAmerica Credit Union where she was the Director of Information Systems & Enterprise Project
Manager Officer from July 2016 to April 2017 and was the Director of Enterprise Risk Management and Business Process Operations from
September 2014 to July 2016. Ms. Merfen has a degree in accounting from Miami University in Ohio.
Part II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Global Select Market under the symbol “CFB” with 420 holders of record at
December 31, 2021.
Stock Performance
Our book value per share for the periods indicated was:
As of December 31,
2021
2020
2019
Book value per share
$
13.23
$
12.08
$
11.58
The following table shows the high and low closing prices per share of the Company’s common stock since our IPO:
Price per Share in 2021
Price per Share in 2020
Price per Share in 2019
High
Low
High
Low
High
Low
Stock Price
$
15.66
$
10.70
$
14.40
$
5.74
$
15.50
$
11.11
31
08-01-1909-01-1910-01-19
11-01-19
12-01-1901-01-2002-01-2003-01-2004-01-2005-01-2006-01-2007-01-2008-01-2009-01-2010-01-2011-01-2012-01-2001-01-2102-01-2103-01-2104-01-2105-01-2106-01-2107-01-2108-01-21
09-01-21
10-01-2111-01-2112-01-21
CFB Stock Performance Graph
CrossFirst Bankshares, Inc.
Russell 2000 Index
KBW Nasdaq Regional Banking Index
The following table and graph sets forth the cumulative total stockholder return for the Company’s common stock from August 15,
2019 (the date that our common stock commenced trading on the Nasdaq Global Select Market) through December 31, 2021 compared to an
overall stock market index (Russell 2000 Index) and one peer group index (KBW Nasdaq Regional Banking Index) for the same period. The
indices are based on total returns assuming reinvestment of dividends. The graph assumes an investment of $100 on August 15, 2019. The
performance graph represents past performance and should not be considered to be an indication of future performance.
The performance graph and related text are being furnished to and not filed with the SEC, and will not be deemed “soliciting
material” or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be
deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically
incorporate such information by reference into such a filing.
August 15, 2019
December 31, 2019
December 31, 2020
December 31, 2021
CrossFirst Bankshares, Inc.
$
100.00
$
99.45
$
73.63
$
106.92
Russell 2000 Index
$
100.00
$
114.85
$
137.77
$
158.19
KBW Nasdaq Regional Banking Index
$
100.00
$
116.94
$
102.79
$
136.92
Dividends
Historically, CrossFirst has not declared or paid any dividends on its common stock. Payments of future dividends, if any, will be at
the discretion of our Board of Directors and will depend upon our results of operations, our financial condition, capital requirements, general
economic conditions, regulatory and contractual restrictions, our business strategy, our ability to service any equity or debt obligations senior
to our common stock and other factors that our Board of Directors deems relevant. We are not obligated to pay dividends on our common
stock and are subject to restrictions on paying dividends on our common stock.
Our principal source of funds to pay dividends on our common stock would be dividends received from our wholly-owned
subsidiaries. Furthermore, our wholly-owned subsidiaries are not obligated to pay dividends to us, and any dividends paid to us would
depend on the earnings or financial condition of our wholly-owned subsidiaries and various business considerations. As is the case with all
financial institutions, the profitability of our wholly-owned subsidiaries is subject to the fluctuating cost and availability of money, changes
in interest rates and economic conditions in general. In addition, various federal and state statutes limit the amount of dividends that our
wholly-owned subsidiaries may pay to the Company without regulatory approval.
32
Share Repurchase Program
The following table summarizes our repurchases of our common shares for the three months ended December 31, 2021:
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
Approximate Dollar Value of Shares
that may yet be Purchased as Part
of Publicly Announced Plans or
Programs
October 1 - 31
73,536
$
14.33
73,536
$
28,945,720
November 1 - 30
166,973
$
14.83
166,973
$
26,468,522
December 1 - 31
325,655
$
14.81
325,655
$
21,652,540
Total
566,164
$
14.75
566,164
On October 18, 2021, the Company announced that its Board of Directors approved a share repurchase program under which the
Company may repurchase up to $30 million of its common stock. Repurchases under the program may be made in 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 it may be suspended at any time at the
Company's discretion. No time limit has been set for completion of the program.
On October 20, 2020, the Company announced that its Board of Directors approved a share repurchase program under which the
Company could repurchase up to $20 million of its common stock. On June 30, 2021, the Company completed its share repurchase program
under which the Company purchased $20 million of its common stock. A total of 1,573,806 common shares were repurchased.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
This section includes a discussion of the financial condition and results of operations of CrossFirst Bankshares, Inc. and its
subsidiaries. Refer to
Management's Discussion and Analysis of Financial Condition and Results of Operations
in our 2020 Form 10-K filed
with the SEC on February 26, 2021 for a discussion of the financial condition and results of operations of the Company for the period ended
December 31, 2019 and a comparison between the 2019 and 2020 results.
Tables may include additional periods to comply with disclosure requirements or to illustrate trends in greater depth. You should read
the following financial data in conjunction with the other information contained in this 10-K, including under “Part I, Item 1A. Risk Factors,”
and in the financial statements and related notes included elsewhere in this 10-K.
Growth History
We have grown organically primarily by establishing our branch lite network in five states, attracting new clients and expanding our
relationships with existing clients, as well as through two strategic acquisitions. The data below presents the business' growth in key areas for
the past five years and the related compound annual growth rate (“CAGR”):
2017 to 2021
As of December 31,
CAGR
2021
2020
2019
2018
2017
(Dollars in thousands)
Available-for-sale securities
2
%
$
745,969
$
654,588
$
739,473
$
661,628
$
701,534
Gross loans (net of unearned income)
(1)
21
4,256,213
4,441,897
3,852,244
3,060,747
1,996,029
Total assets
17
5,621,457
5,659,303
4,931,233
4,107,215
2,961,118
Noninterest-bearing deposits
41
1,163,224
718,459
521,826
484,284
290,906
Total deposits
19
%
$
4,683,597
$
4,694,740
$
3,923,759
$
3,208,097
$
2,303,364
(1)
33
Our Strategy
Our strategy has been to build the most trusted bank in our markets, which we believe drives value for our stockholders. We are
committed to a culture of serving our clients in extraordinary ways by providing personalized, relationship-based banking. We believe that
success is achieved through establishing and growing the trust of our clients, employees, stakeholders, and communities.
During 2021, the COVID-19 pandemic allowed us to serve our customers by providing PPP loan funding, modifying loans through
payment deferrals and rate adjustments, and using our technology to reduce contact exposure. Despite the impact of the COVID-19 pandemic
in 2021, we remain focused on growth and building stockholder value through greater efficiency and increased profitability. We intend to
execute our strategic plan through the following:
• Continue organic growth;
• Selectively pursue opportunities to expand through acquisitions or new market development;
• Attract and develop talent;
• Improve financial performance;
• Maintain a branch-lite business model with strategically placed locations; and
• Leverage technology to enhance the client experience and improve profitability.
Performance Measures
As of or for the Year Ended December 31,
2021
2020
2019
(Dollars in thousands, except per share data)
Return on average assets
1.24
%
0.24
%
0.63
%
Return on average equity
10.84
%
2.05
%
5.38
%
Earnings per share
(1)
$
1.35
$
0.24
$
0.59
Diluted earnings per share
(1)
$
1.33
$
0.24
$
0.58
Efficiency
(2)
54.50
%
58.13
%
58.37
%
Equity to assets
11.88
%
11.03
%
12.20
%
(1)
Retroactively adjusted per share figures to account for a two-for-one split of our common stock in the form of a stock dividend, whereby each holder of
our common stock received one additional share of common stock for each share owned as of the record date of December 19, 2018.
(2)
We calculate efficiency ratio as noninterest expense divided by the sum of net interest income and noninterest income.
2021 Highlights:
●
Net income for the fiscal year ended December 31, 2021 was $69 million, an increase of $57 million or 451% from the prior
year ended December 31, 2020.
●
Total assets were $5.6 billion primarily made up of $4.3 billion in loans and $746 million in available-for-sale securities.
●
Improved our fiscal year efficiency ratio from 58.13% in 2020 to 54.50% in 2021.
●
Purchased 1,530,357 or $22 million of outstanding shares as part of the share repurchase programs in 2021.
●
Expanded into Phoenix, Arizona.
●
Increased tangible book value per share to $13.23 at December 31, 2021 compared to $12.08 at December 31, 2020.
34
COVID-19 Pandemic Impact
The COVID-19 pandemic has caused, and may continue to cause, economic uncertainty and a disruption to the financial markets, the
duration and extent of which is not currently known. A discussion of the impact of the COVID-19 pandemic on the Company and its
operations and measures undertaken by the Company in response thereto is provided below.
Bank Operations
The Company has a business continuity plan to mitigate operational risks in unusual, unexpected events. The plan identifies key
components of our operations and creates responses to ensure normal operations continue and to minimize the effects of potential loss. We
implemented the business continuity procedures in March 2020 as a result of the COVID-19 pandemic. In April 2021, substantially all
employees returned to on-premises work. In addition, a hybrid work opportunity was created for most employees. No material interruptions
to our business operations have occurred to date.
Paycheck Protection Program (“PPP”) Lending Facility
The PPP was established by the CARES Act and authorized forgivable loans to small businesses. The Consolidated Appropriations
Act of 2021 allocated additional PPP funding. The Bank provided PPP loans to support current customers and foster relationships with new
customers. The loans earned interest at 1%, included fees between 1% and 5% and typically matured in two or five years. The loans
originated under the PPP received a 0% risk weight under the regulatory capital rules which resulted in increased Common Equity Tier 1,
Tier 1, and Tier 2 capital ratios, but the PPP loans are included in the calculation of our Leverage ratio.
The following table summarizes the impact of the PPP loans on our 2021 and 2020 financials:
For the Year Ended December 31,
2021
2020
(Dollars in thousands)
PPP Loan Activity
Outstanding loan balance, beginning
$
292,230
$
—
Loan increases
133,778
369,260
Loan payoffs
(361,203)
(77,030)
Outstanding loan balance, end
$
64,805
$
292,230
For the Year Ended December 31,
2021
2020
(Dollars in thousands)
PPP Loan Fee Activity
Unearned fee balance, beginning
$
4,189
$
—
Unearned fees added
5,062
9,946
Earned fees recognized
(7,568)
(5,757)
Unearned fee balance, end
$
1,683
$
4,189
† Earned fees include fees earned from loans forgiven and monthly amortization fees on loans outstanding.
Loan Modifications
The CARES Act as extended by the Consolidated Appropriations Act of 2021, allowed financial institutions to elect to suspend GAAP
principles and regulatory determinations for loan modifications relating to the COVID-19 pandemic that would otherwise require evaluation
as troubled debt restructurings (“TDR”) from March 1, 2020 to January 2, 2022 as long as the loan was not more than 30 days past due as of
December 31, 2019. The Company elected to use this guidance and started the modified loan process during the first quarter of 2020. As of
December 31, 2021, the Company had 6 loans with an outstanding balance of $17 million that were still under these modified terms.
35
Current Expected Credit Loss (“CECL”) Implementation
On January 1, 2022, the Company adopted ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.” Topic 326 replaces the incurred loss model for determining the allowance for credit losses (“ACL”),
formerly presented as the allowance for loan losses (“ALLL”). The CECL approach requires immediate recognition of estimated credit losses
expected to occur over the estimated remaining life of the asset. As a result, the new approach may accelerate the recording of credit losses
compared to the former, incurred loss model. The new standard does not change the credit risk of the Company’s loans or the ultimate losses
incurred by the Company on those loans. Topic 326 may result in increased volatility in the Company’s net income and capital levels due to
changes in the reasonable and supportable forecast of future economic conditions on a quarterly basis.
For information regarding our implementation process, refer to “
Note 1: Nature of Operations and Summary of Significant Accounting
Policies”
within the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K.
The Company adopted Topic 326 through a modified retrospective approach that results in a cumulative-effect adjustment to retained
earnings as of the day of adoption. The Company anticipates the January 1, 2022 ACL to be between $55 million and $61 million compared
to $58 million as of December 31, 2021.
In addition, CECL applies to off-balance sheet credit exposures, such as unfunded lines of credit, financial guarantees not accounted
for as derivatives, and other unfunded loan commitments. The expected credit loss liability for off-balance sheet credit exposures is estimated
over the contractual period in which the Company is exposed to credit risk unless the obligation is unconditionally cancellable by the issuer.
The credit loss estimate for off-balance sheet credit exposure considers the likelihood that funding will occur and if funded, the related
estimate of expected credit losses. Changes in the estimated credit loss are reported in the statement of income and the expected credit loss
estimate for unfunded commitments is reported as a liability on the balance sheet. Once a loan is funded, the expected credit loss for off-
balance sheet exposures will be transferred to the ACL.
The Company expects to record a $4 million to $8 million credit loss liability for off-balance sheet credit exposures. The credit loss
liability will result in a decrease to retained earnings, net of the deferred tax asset.
The change in the required ACL is primarily a result of: (i) consolidation of previously disaggregated loan pools, (ii) an increase in the
lookback period, and (iii) incorporation of reasonable and supportable forecasts. Under the incurred loss model, the Company disaggregated
loans by risk ratings and loan categories. Under the CECL model, the Company’s pools were reduced and did not sub-segment by risk rating.
The change in the Company’s loan pools is expected to decrease the required reserve as of January 1, 2022. The incurred loss model’s look-
back period was short compared to the CECL methodology that requires the use of a full economic cycle. The change in the look-back period
is expected to decrease the required reserve. The application of forward-looking guidance is new under the CECL methodology. The
Company uses the unemployment rate guidance provided by the Federal Reserve and reverts to an average unemployment rate outside of the
forecast periods. The change in methodology does not materially impact the Company’s loans that were impaired as of December 31, 2021.
The reserve for unfunded commitments that are not unconditionally cancelable by the Company will be driven by: (i) The type of loan
commitment which are grouped using the same loan pools for the loan portfolio. For example, the expected funding of residential
construction loans is expected to be higher than funding for energy loans; (ii) changes in historical loss rates; (iii) qualitative factors; and (iv)
average utilization rates.
Topic 326 eliminates the other than temporary impairment (“OTTI”) methodology on available-for-sale securities. The OTTI method
is replaced with an allowance and related credit loss expense. This allows subsequent increases in fair market value of the security to be
recognized by reducing the allowance and reversing previous credit loss expense recorded. The Company’s available-for-sale securities were
not materially impacted by Topic 326’s implementation.
We anticipate the implementation of Topic 326 will not have a material impact on our capital ratios. The Federal Reserve System, the
Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency adopted a joint final rule for an optional phase-in
period of three years for banks to absorb the impact to regulatory capital of implementing the new CECL standard. For the first year of the
transition, the Company may reduce the impact of CECL on retained earnings by 75%. For years two and three, the regulatory capital
schedules would continue to be adjusted based on declining amount of 25% each year.
Customer and Industry Concentrations
As of December 31, 2021, the Company’s top 20 customer relationships, represented approximately 27% or $1.2 billion of total
deposits. The majority of the $1.2 billion are money market deposit accounts. 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 detrimental effect on the Company’s financial position or operations.
36
For the year ended December 31, 2021, a significant portion of the Company’s ATM and credit card interchange income was driven by
companies that mobilized their workforce directly impacted by the COVID-19 pandemic. These companies represented $5 million or 61% of
the $8 million in ATM and credit card interchange income. We anticipate that the related non-interest income will fluctuate in the near term
based on COVID-19 pandemic.
Update to 2021 Events Discussed in the Previous 10-K
Four of our branches are in areas that were impacted by severe, cold weather conditions in February and March of 2021. One branch
sustained water damage but did not impact operations or our ability to support our customers. In 2021, the Company repaired and replaced
the property and equipment impacted by the water damage. The related cost was primarily paid for by our insurance provider.
Discussion and Analysis - Results of Operations
Net Interest Income
Our profitability depends in substantial part on our net interest income. Net interest income is the difference between the amounts
received on our interest-earning assets and the interest paid on our interest-bearing liabilities. Net interest income is impacted by internal and
external factors including:
• Changes in the volume, rate, and mix of interest-earning assets and interest-bearing liabilities;
• Changes in competition, federal economic, monetary and fiscal policies and economic conditions; and
• Changes in credit quality.
We present and discuss net interest income on a tax-equivalent basis. A tax-equivalent basis presents all income taxable at the same
rate. For example, $100 of tax-exempt income would be presented as $126.58, an amount that, if taxed at the statutory federal income tax
rate of 21% would yield $100. We believe a tax-equivalent basis provides for improved comparability between the various earning assets.
For the fiscal year ended December 31, 2017 to the second quarter of 2019, we operated in a rising interest rate environment. Our
yield on earning assets and cost of funds were driven by the rate environment. In July 2019, interest rates started to decline and continued
through 2021. Our earning assets repriced quicker than our cost of funds, resulting in a lower net interest margin in 2019 and 2020. During
2021, the Company benefited from changes in our deposit mix, including an increase in non-interest-bearing deposits and a reduction in time
deposits that improved our overall cost of funds. The reduced cost of funds was offset by reductions in earning-asset yields. A table showing
our three-year yield on earning assets and cost of funds is presented below:
For the Year Ended December 31,
2021
2020
2019
Yield on securities - tax equivalent
(1)
2.90
%
3.05
%
3.35
%
Yield on loans
4.02
4.26
5.52
Yield on earning assets - tax equivalent
(1)
3.60
3.96
5.04
Cost of interest-bearing deposits
0.49
1.02
2.21
Cost of total deposits
0.40
0.85
1.89
Cost of FHLB and short-term borrowings
2.09
1.56
1.90
Cost of funds
0.50
0.92
1.90
Net interest margin - tax equivalent
(1)
3.15
%
3.13
%
3.31
%
(1)
Tax-exempt income is calculated on a tax-equivalent basis. Tax-free municipal securities are exempt from Federal taxes. The incremental tax rate used is
21%.
37
The following table presents, for the periods indicated, average balance sheet information, interest income, interest expense and the corresponding average yield earned and
rates paid:
For the Years Ended December 31,
2021
2020
2019
Average
Balance
Interest
Income /
Expense
Yield /
Rate
(4)
Average
Balance
Interest
Income /
Expense
Yield /
Rate
(4)
Average
Balance
Interest
Income /
Expense
Yield /
Rate
(4)
(Dollars in thousands)
Interest-earning assets:
Securities - taxable
$
204,889
$
3,955
1.93
%
$
267,715
$
6,058
2.26
%
$
330,051
$
9,627
2.92
%
Securities - tax-exempt
(1)
518,058
16,981
3.28
447,324
15,745
3.52
390,908
14,533
3.72
Federal funds sold
—
—
—
1,020
18
1.73
15,195
364
2.40
Interest-bearing deposits in other banks
389,893
502
0.13
179,978
621
0.35
139,538
2,689
1.93
Gross loans, net of unearned
income
(2)(3)
4,340,791
174,660
4.02
4,310,345
183,738
4.26
3,468,079
191,527
5.52
Total interest-earning assets
(1)
5,453,631
$
196,098
3.60
%
5,206,382
$
206,180
3.96
%
4,343,771
$
218,740
5.04
%
Allowance for loan losses
(73,544)
(68,897)
(42,015)
Other noninterest-earning assets
211,384
220,994
198,008
Total assets
$
5,591,471
$
5,358,479
$
4,499,764
Interest-bearing liabilities
Transaction deposits
$
608,063
$
1,152
0.19
%
$
447,777
$
1,696
0.38
%
$
146,109
$
1,742
1.19
%
Savings and money market deposits
2,338,315
8,225
0.35
1,993,964
14,033
0.70
1,676,417
35,385
2.11
Time deposits
812,774
9,146
1.13
1,155,492
20,856
1.80
1,243,304
30,541
2.46
Total interest-bearing deposits
3,759,152
18,523
0.49
3,597,233
36,585
1.02
3,065,830
67,668
2.21
FHLB and short-term borrowings
279,379
5,840
2.09
417,956
6,508
1.56
366,577
6,959
1.90
Trust preferred securities, net of fair
value adjustments
982
96
9.76
939
106
11.34
899
147
16.34
Noninterest-bearing deposits
876,309
—
—
684,294
—
—
512,142
—
—
Cost of funds
4,915,822
$
24,459
0.50
%
4,700,422
$
43,199
0.92
%
3,945,448
$
74,774
1.90
%
Other liabilities
35,447