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2
CrossFirst Bankshares, Inc.
Form 10-Q for the Quarter Ended March 31, 2022
Index
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Forward-Looking Information
4
5
6
7
8
Notes to Condensed Consolidated Financial Statements (unaudited)
9
14
14
18
34
36
37
37
38
40
40
44
44
44
45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
46
49
49
51
52
54
54
54
54
55
57
60
61
62
63
64
Part II. Other Information
64
65
65
66
67
3
Forward-Looking Information
This report may contain forward-looking statements that reflect our current views with respect to, among other things, future
events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as
“may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,”
“intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version
of those words or other comparable words or phrases of a future or forward-looking nature.
These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about
our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently
uncertain and beyond our control. Accordingly, the Company cautions you that any such forward-looking statements are not guarantees
of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although the
Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results
may prove to be materially different from the results expressed or implied by the forward-looking statements. Such possible events or
factors include: risks associated with the current outbreak of the novel coronavirus, or the COVID-19 pandemic, changes in economic
conditions in the Company’s market area, changes in policies by regulatory agencies, governmental legislation and regulation,
fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company’s market area, changes in accounting
and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats,
and such other factors as discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed
with the Securities and Exchange Commission (“SEC”) on February 28, 2022, any subsequent quarterly report on Form 10-Q as well as
in the Company’s other filings with the SEC.
The Company undertakes no obligation to revise or publicly release the results of any revision to these forward-looking
statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such
forward-looking statements.
See Notes to Condensed Consolidated Financial Statements (unaudited)
4
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2022
December 31, 2021
(2)
(Unaudited)
(Dollars in thousands)
Assets
Cash and cash equivalents
$
$
Available-for-sale securities - taxable
Available-for-sale securities - tax-exempt
Loans, net of unearned fees
Allowance for credit losses on loans
(1)
Net loans
Premises and equipment, net
Restricted equity securities
Interest receivable
Foreclosed assets held for sale
Bank-owned life insurance
Other
Total assets
$
$
Liabilities and stockholders’ equity
Deposits
Noninterest-bearing
$
$
Savings, NOW and money market
Time
Total deposits
Federal Home Loan Bank advances
Other borrowings
Interest payable and other liabilities
Total liabilities
Stockholders’ equity
Common stock, $
authorized -
March 31, 2022 and December 31, 2021, respectively
Treasury stock, at cost:
respectively
(45,109 )
(28,347 )
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
(21,012 )
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
(1)
As of December 31, 2021, this line represents the allowance for loan losses. See further discussion in
“Note 1: Nature of
Operations and Summary of Significant Accounting Policies”
in the Notes to Condensed Consolidated Financial Statements
(unaudited).
(2)
The year-end Condensed Consolidated Balance Sheet was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United States of America.
See Notes to Condensed Consolidated Financial Statements (unaudited)
5
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
Three Months Ended
March 31,
2022
2021
(Dollars in thousands except per share data)
Interest Income
Loans, including fees
$
$
Available-for-sale securities - taxable
Available-for-sale securities - tax-exempt
Deposits with financial institutions
Dividends on bank stocks
Total interest income
Interest Expense
Deposits
Fed funds purchased and repurchase agreements
Federal Home Loan Bank Advances
Other borrowings
Total interest expense
Net Interest Income
Provision for Credit Losses
(1)
(625 )
Net Interest Income after Provision for Credit Losses
(1)
Non-Interest Income
Service charges and fees on customer accounts
Realized gains (losses) on available-for-sale securities
(26 )
Unrealized losses, net on equity securities
(103 )
(39 )
Income from bank-owned life insurance
Swap fees and credit valuation adjustments, net
ATM and credit card interchange income
Other non-interest income
Total non-interest income
Non-Interest Expense
Salaries and employee benefits
Occupancy
Professional fees
Deposit insurance premiums
Data processing
Advertising
Software and communication
Foreclosed assets, net
(53 )
Other non-interest expense
Total non-interest expense
Net Income Before Taxes
Income tax expense
Net Income
$
$
Basic Earnings Per Share
$
$
Diluted Earnings Per Share
$
$
(1)
For the three-months ended March 31, 2021, this line represents the provision for loan losses. See further discussion of this
change in
“Note 1: Nature of Operations and Summary of Significant Accounting Policies”
in the Notes to Condensed
Consolidated Financial Statements (unaudited).
See Notes to Condensed Consolidated Financial Statements (unaudited)
6
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
Three Months Ended
March 31,
2022
2021
(Dollars in thousands)
Net Income
$
$
Other Comprehensive Loss
Unrealized loss on available-for-sale securities
(58,956 )
(9,070 )
Less: income tax benefit
(14,433 )
(2,221 )
Unrealized loss on available-for-sale securities
(44,523 )
(6,849 )
Reclassification adjustment for realized gains (losses) included in income
(26 )
Less: income tax expense (benefit)
(6 )
Less: reclassification adjustment for realized gain (loss) included in income, net of income tax
(20 )
Unrealized gain on cash flow hedges
Less: income tax expense
Unrealized gain on cash flow hedges, net of income tax
Other comprehensive loss
(42,501 )
(6,857 )
Comprehensive Income (Loss)
$
(25,673 )
$
See Notes to Condensed Consolidated Financial Statements (unaudited)
7
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Treasury Stock
Total
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2020
$
$
$
$
$
(6,061 )
$
Net income
-
-
-
-
-
Change in unrealized depreciation of available-
for-sale securities
-
-
-
-
(6,857 )
-
(6,857 )
Issuance of shares from equity-based awards
-
(404 )
-
-
-
(404 )
Open market common share repurchases
(88,497 )
-
-
-
-
(1,052 )
(1,052 )
Employee receivables from sale of stock
-
-
-
-
-
Stock-based compensation
-
-
-
-
-
Balance at March 31, 2021
$
$
$
$
$
(7,113 )
$
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss)
Treasury Stock
Total
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2021
$
$
$
$
$
(28,347 )
$
Cumulative effect from changes in accounting
principle
(a)
-
-
-
(2,610 )
-
-
(2,610 )
Net income
-
-
-
-
-
Other comprehensive loss
-
-
-
-
(42,501 )
-
(42,501 )
Issuance of shares from equity-based awards
(620 )
-
-
-
(617 )
Open market common share repurchases
(1,058,332 )
-
-
-
-
(16,762 )
(16,762 )
Employee receivables from sale of stock
-
-
-
-
-
Stock-based compensation
-
-
-
-
-
Exercise of warrants
-
-
-
-
Balance at March 31, 2022
$
$
$
$
(21,012 )
$
(45,109 )
$
(a)
Measurement of Credit Losses on Financial Instruments. See “Note 1: Nature of Operations and Summary of Significant Accounting Policies” in the Notes to Condensed
Consolidated Financial Statements (unaudited) for more information on the Company’s adoption of this guidance and the impact to the Company’s results of operations.
See Notes to Condensed Consolidated Financial Statements (unaudited)
8
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three Months Ended
March 31,
2022
2021
(Dollars in thousands)
Operating Activities
Net income
$
$
Items not requiring (providing) cash
Depreciation and amortization
Provision for credit losses
(1)
(625 )
Accretion of discounts and amortization of premiums on securities
Equity based compensation
Deferred income taxes
Net realized (gains) losses on available-for-sale securities
(10 )
Changes in
Interest receivable
(910 )
(751 )
Other assets
(28,730 )
Other liabilities
(21,779 )
(4,937 )
Net cash provided by (used in) operating activities
(9,735 )
Investing Activities
Net change in loans
(94,437 )
(74,947 )
Purchases of available-for-sale securities
(49,138 )
(74,575 )
Proceeds from maturities of available-for-sale securities
Proceeds from the sale of foreclosed assets
Purchase of premises and equipment
(962 )
(118 )
Proceeds from the sale of premises and equipment and related insurance claims
Proceeds from sale of restricted equity securities
Net cash used in investing activities
(131,161 )
(114,685 )
Financing Activities
Net increase in demand deposits, savings, NOW and money market accounts
Net decrease in time deposits
(112,320 )
(111,691 )
Net increase (decrease) in fed funds purchased and repurchase agreements
Repayment of Federal Home Loan Bank advances
(10,000 )
(10,000 )
Issuance of common shares, net of issuance cost
Proceeds from employee stock purchase plan
Repurchase of common stock
(16,762 )
(1,052 )
Acquisition of common stock for tax withholding obligations
(793 )
(404 )
Net decrease in employee receivables
Net cash provided by (used in) financing activities
(89,124 )
Increase (Decrease) in Cash and Cash Equivalents
(205,800 )
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
$
$
Supplemental Cash Flows Information
Interest paid
$
$
Income taxes paid
$
$
(1)
Notes to Condensed Consolidated Financial Statements
(unaudited)
9
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
CrossFirst Bankshares, Inc. (the “Company”) is a bank holding company whose principal activities are the ownership and
management of its wholly-owned subsidiary, CrossFirst Bank (the “Bank”). In addition, the Bank has
CrossFirst Investments, Inc. (“CFI”) that holds investments in marketable securities, CFBSA I, LLC and CFBSA II, LLC.
The Bank is primarily engaged in providing a full range of banking and financial services to individual and corporate customers
through its branches in: (i) Leawood, Kansas; (ii) Wichita, Kansas; (iii) Kansas City, Missouri; (iv) Oklahoma City, Oklahoma; (v)
Tulsa, Oklahoma; (vi) Dallas, Texas; (vii) Frisco, Texas; and (viii) Phoenix, Arizona.
During the first quarter of 2022, the Company expanded its restaurant finance group. The group will provide established and
high-growth restaurant chains customized banking solutions, including financing, treasury services, commercial cards, merchant
processing, and international banking services.
Basis of Presentation
The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States
(“GAAP”). The consolidated financial statements include the accounts of the Company, the Bank, CFI, CFBSA I, LLC and CFBSA II,
LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated interim financial statements are unaudited. Certain information and footnote disclosures presented in
accordance with GAAP have been condensed or omitted and should be read in conjunction with the Company’s consolidated financial
statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021
Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2022.
necessary for the fair presentation of the financial position, results of operations, and cash flows of the Company and the disclosures
made are adequate to make the interim financial information not misleading. The consolidated financial statements have been prepared
in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the SEC.
Refer to the “accounting pronouncements implemented” below for changes in the accounting policies of the Company. No
significant changes to the Company’s accounting policies, other than those mentioned under “accounting pronouncements implemented”
below, have occurred since December 31, 2021, the most recent date financial statements were provided within the Company’s 2021
Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected
for a full year or any future period.
Use of Estimates
The Company identified accounting policies and estimates that, due to the difficult, subjective or complex judgments and
assumptions inherent in those policies and estimates and the potential sensitivity of the Company’s financial statements to those
judgments and assumptions, are critical to an understanding of the Company’s financial condition and results of operations. Actual
results could differ from those estimates. The allowance for credit losses, deferred tax asset, and fair value of financial instruments are
particularly susceptible to significant change.
Notes to Condensed Consolidated Financial Statements
(unaudited)
10
Cash Equivalents
The Company had $
The reserve required at March 31, 2022 was $
.
Emerging Growth Company (“EGC”)
The Company is currently an EGC. An EGC may take advantage of reduced reporting requirements and is relieved of certain
other significant requirements that are otherwise generally applicable to public companies. Among the reductions and reliefs, the
Company elected to extend the transition period for complying with new or revised accounting standards affecting public companies.
This means that the financial statements the Company files or furnishes will not be subject to all new or revised accounting standards
generally applicable to public companies for the transition period for so long as the Company remains an EGC or until the Company
affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.
Accounting Pronouncements Implemented
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments:
Background
measured at amortized cost, including loans held-for-investment and off-balance sheet credit exposures. The Current Expected
Credit Loss (“CECL”) model requires an estimate of expected credit losses, measured over the contractual life of an instrument,
that considers forecasts of future economic conditions in addition to information about past events and current conditions. ASU
2016-13 requires new disclosures, including the use of vintage analysis on the Company’s credit quality indicators.
In addition, ASU 2016-13 removes the available-for-sale (“AFS”) securities other-than-temporary-impairment model that reduced
the cost basis of the investment and is replaced with an impairment model that will recognize an allowance for credit losses on
available-for-sale securities.
Implementation
selection, implementation, and testing of third-party software.
The Company used a loss-rate ("cohort") method to estimate the expected allowance for credit losses ("ACL") for all loan pools.
The cohort method identifies and captures the balance of a pool of loans with similar risk characteristics, as of a particular point
in time to form a cohort, then tracks the respective losses generated by that cohort of loans over their remaining lives, or until the
loans are “exhausted” (i.e.; have reached an acceptable point in time at which a significant majority of all losses are
expected to have been recognized). The cohort method closely aligned with the Company's incurred loss model. This allowed the
Company to take advantages of the efficiencies of processes and procedures already in practice.
The Company began parallel processing with the existing allowance for loan losses model during the first quarter of 2019
recalibrating inputs as necessary. The Company formulated changes to policies, procedures, disclosures, and internal controls that
were necessary to transition to the new standard. A third-party completed validation of the completeness, accuracy, and
reasonableness of the model in the fourth quarter of 2021. Refer to “Note 4: Loans and Allowance for Credit Losses (“ACL”)” for
additional information regarding the policies, procedures, and credit quality indicators used by the Company.
Impact of adoption
disclosures as of and for the three-months ended March 31, 2022 are presented in accordance with ASC 326, Financial
Instruments-Credit Losses. The Company did not recast comparative financial periods and has presented those disclosures under
previously applicable GAAP.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11
The Company used the prospective transition approach for AFS securities for which other-than-temporary-impairment has been
recognized prior to January 1, 2022. As a result, the amortized cost basis remains the same before and after the effective date of
ASU 2016-13.
Because the Company chose the cohort method, the model must consider net deferred fees and costs. As a result, the Company
transferred the previously disclosed unearned fees into the applicable loan segments.
The following table illustrates the impact of adopting ASU 2016-13 and details how outstanding loan balances have been
reclassified because of changes made to the Company’s loan segments under CECL
:
January 1, 2022
As Reported under ASU
2016-13
Pre-ASU 2016-13
Impact of ASU 2016-13
Adoption
(Dollars in thousands)
Assets:
Loans (outstanding balance)
Commercial
$
$
$
(558,657 )
Commercial lines of credit
Energy
(281 )
Commercial real estate
(2,616 )
Construction and land development
(3,906 )
Residential real estate
(240,770 )
Multifamily real estate
PPP
(64,805 )
Consumer
Gross Loans
(13,407 )
Net deferred loan fees and costs
(13,407 )
Allowance for credit losses on loans
(1,747 )
Loans, net
Deferred tax asset
$
$
$
(827 )
Liabilities
Allowance for credit losses on off-balance
sheet exposures
$
$
$
Stockholders' equity
Retained earnings
$
$
$
(2,610 )
In connection with adoption of ASU 2016-13, changes were made to the Company’s loan segments to align with the methodology
applied in determining the allowance under CECL. The commercial loan portfolio was separated into term loans and lines of
credit. In addition, the remaining Paycheck Protection Program (“PPP”) loans were consolidated into the commercial term loan
segment due to their declining outstanding balance. The Company also separated the residential and multifamily real estate loan
segments. Refer to “Note 4: Loans and Allowance for Credit Losses (“ACL”)” for detail on the loan segments.
Accounting Policies:
Notes to Condensed Consolidated Financial Statements
(unaudited)
12
Accrued Interest -
The Company made an accounting policy election to exclude accrued interest from the amortized cost basis of loans. In addition,
the Company elected not to measure an allowance for credit losses for accrued interest receivable, because a timely write-off
policy exists. The policy generally requires loans to be placed on nonaccrual when principal or interest is 90 days or more past
due unless the loan is well-secured and in the process of collection. A well-secured loan means that collateral or a guaranty has
sufficient value to pay off the loan in full. When a loan is placed on nonaccrual, accrued interest is reversed against interest
income.
The Company made a policy election to exclude accrued interest from the amortized cost basis of AFS securities. AFS securities
are placed on non-accrual status when the Company no longer expects to receive all contractual amounts due, which is generally
at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status.
Accordingly, the Company did not recognize an allowance for credit loss against accrued interest receivable.
Available-for-sale Securities in an Unrealized Loss Position –
For AFS securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not
that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or
requirement to sell is met, the securities’ amortized cost basis is written down to fair value through income. For AFS securities
that do not meet the criteria above, the Company evaluates whether the decline in fair value has resulted from credit losses or
other factors. Management considers the extent to which fair value is less than amortized cost, any changes to the rating of the
security by a rating agency, and adverse conditions specifically related to the security, among other factors.
If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is
compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the
amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount
that the fair value is less than amortized cost basis.
ASU 2016-02, Leases (Topic 842):
Background
such leases. This represents a change from previous GAAP that did not require operating leases to be recognized on the lessees’
balance sheet. The purpose of Topic 842 is to increase transparency and comparability between organizations that enter into lease
agreements. The update modifies lease disclosure requirements as well.
On the lease commencement date (or on the date of adoption), a lessee is required to measure and record a lease liability equal to
the present value of the remaining lease payments, discounted using an appropriate discount rate. In addition, a right-of-use asset
is recorded that consists of the initial measurement of the lease liability adjusted for certain payments, including lease incentives
received and initial direct costs.
For operating leases, after lease commencement, the lease liability is reported at the present value of the unpaid lease payments
discounted using the discount rate established at lease commencement. The lease expense is calculated by summing all future
lease payments in the lease term and lease incentives not yet recognized. The sum is then amortized on a straight-line basis over
the lease term. The right-of-use asset is amortized as the difference between the straight -line expense and the amortizing lease
liability.
Implementation
properties located in the Kansas City, Missouri; Tulsa, Oklahoma; Dallas, Texas; Frisco, Texas; and Phoenix, Arizona markets.
The remaining lease terms range from two to twenty years with potential renewal terms. The leases include various payment
Notes to Condensed Consolidated Financial Statements
(unaudited)
13
terms including fixed payments with annual increases to variable payments. In addition, several of the leases include lease
incentives.
The discount rates were not readily determinable in the lease agreements. As a result, the Company used the incremental
borrowing rate in accordance with Topic 842. The Company used the FHLB yield curve as the incremental borrowing rate.
The Company elected several practical expedients that are listed below:
Practical Expedient Elected
Impact to Lease Accounting Implementation
An entity need not reassess whether any expired
or existing contracts are or contain leases.
The Company was not required to re-evaluate previously identified leases,
including embedded leases, that existed as of the adoption date.
An entity need not reassess the lease classification
for an expired or existing leases.
The Company was not required to re-classify previously identified operating
leases that existed as of the adoption date. The Company did not have any
capital leases as of December 31, 2021.
An entity need not reassess initial direct costs for
any existing leases.
The Company was not required to review previously established lease
agreements as of the adoption date for initial direct costs. Initial direct costs
increase the right-of-use asset and do not impact the lease liability.
An entity may combine lease and nonlease
components.
If not elected, the Company would be required to allocate the total
consideration in a lease contract to lease and nonlease components based on
their relative standalone price. The election results in higher right-of-use
assets and lease liabilities.
Short-term lease exemption.
The Company is not required to record a right-of-use asset and lease liability
for a lease whose term is 12 months or less and does not include a purchase
option that the lessee is reasonably certain to exercise.
Impact of Adoption
Company did not recast comparative financial periods and has presented those disclosures under previously applicable GAAP.
The following table illustrates the impact of adopting ASU 2016-02 on the Company’s financial statements:
January 1, 2022
As Reported under ASU
2016-02
Pre-ASU 2016-02
Impact of ASU 2016-02
Adoption
(Dollars in thousands)
Assets:
Right-of-use asset
$
$
$
Liabilities:
Lease incentive
(2,125 )
Accrued rent payable
(904 )
Lease liability
$
$
$
Recent Accounting Pronouncements
ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures
Background
gross write-offs. The update eliminates the accounting guidance for TDRs and requires a company to determine if a modification
results in a new loan or a continuation of an existing loan. The update enhances the required disclosures for certain modifications
made to borrowers experiencing financial difficulty.
In addition, the update requires disclosure of current-period gross charge-offs by year of origination for financing receivables.
Notes to Condensed Consolidated Financial Statements
(unaudited)
14
For the Company, the amendments are effective as of January 1, 2023, but early adoption is permitted and would be applied as of
the beginning of the fiscal year of adoption.
Impact of adoption
impact cannot be established.
Note 2: Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
Three Months Ended
March 31,
2022
2021
(Dollars in thousands except per share data)
Earnings per Share
Net income available to common stockholders
$
$
Weighted average common shares
Earnings per share
$
$
Diluted Earnings per Share
Net income available to common stockholders
$
$
Weighted average common shares
Effect of dilutive shares
Weighted average dilutive common shares
Diluted earnings per share
$
$
Stock-based awards not included because to do so would be antidilutive
Note 3: Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of period end available-for-sale
securities consisted of the following:
March 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
$
$
$
Collateralized mortgage obligations - GSE residential
State and political subdivisions
Corporate bonds
Total available-for-sale securities
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
15
December 31, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
$
$
$
Collateralized mortgage obligations - GSE residential
State and political subdivisions
Corporate bonds
Total available-for-sale securities
$
$
$
$
As of March 31, 2022, the available-for-sale securities had $
The amortized cost and fair value of available-for-sale securities at March 31, 2022, by contractual maturity, are shown below:
March 31, 2022
Within
After One to
After Five to
After
One Year
Five Years
Ten Years
Ten Years
Total
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
(1)
Amortized cost
$
-
$
$
$
$
Estimated fair value
$
-
$
$
$
$
Weighted average yield
(2)
-
%
%
%
%
%
Collateralized mortgage obligations -
GSE residential
(1)
Amortized cost
$
-
$
-
$
$
$
Estimated fair value
$
-
$
-
$
$
$
Weighted average yield
(2)
-
%
-
%
%
%
%
State and political subdivisions
Amortized cost
$
$
$
$
$
Estimated fair value
$
$
$
$
$
Weighted average yield
(2)
%
%
%
%
%
Corporate bonds
Amortized cost
$
-
$
$
$
-
$
Estimated fair value
$
-
$
$
$
-
$
Weighted average yield
(2)
-
%
%
%
-
%
%
Total available-for-sale securities
Amortized cost
$
$
$
$
$
Estimated fair value
$
$
$
$
$
Weighted average yield
(2)
%
%
%
%
%
1)
Actual maturities may differ from contractual maturities because issuers may have the rights to call or prepay obligations with or
without prepayment penalties.
2)
Yields are calculated based on amortized cost.
Notes to Condensed Consolidated Financial Statements
(unaudited)
16
The following tables show the number of securities, unrealized loss, and fair value of the Company’s investments with unrealized
losses, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at
March 31, 2022 and December 31, 2021:
March 31, 2022
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
(Dollars in thousands)
Available-for-sale
securities
Mortgage-backed -
GSE residential
$
$
$
$
$
$
Collateralized
mortgage obligations
- GSE residential
State and political
subdivisions
Corporate bonds
Total temporarily
impaired securities
$
$
$
$
$
$
December 31, 2021
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
(Dollars in thousands)
Available-for-sale
securities
Mortgage-backed -
GSE residential
$
$
$
$
$
$
Collateralized
mortgage obligations
- GSE residential
State and political
subdivisions
Corporate bonds
Total temporarily
impaired securities
$
$
$
$
$
$
Based on the Company’s evaluation at March 31, 2022, under the new impairment model, an allowance for credit losses has
t
been recorded
r have unrealized losses been recognized into income. The issuers of the securities are of high credit quality and have a
long history of no credit losses, management does not intend to sell and it is likely that management will not be required to sell the
securities prior to their anticipated recovery, and the decline in fair value is largely attributed to changes in interest rates and other
market conditions. The issuers continue to make timely principal and interest payments.
Notes to Condensed Consolidated Financial Statements
(unaudited)
17
The following tables show the gross gains and losses on securities that matured or were sold:
For the Three Months Ended
March 31, 2022
Gross Realized
Gains
Gross Realized
Losses
Net Realized Loss
(Dollars in thousands)
Available-for-sale securities
$
$
$
(26 )
For the Three Months Ended
March 31, 2021
Gross Realized
Gains
Gross Realized
Losses
Net Realized Gain
(Dollars in thousands)
Available-for-sale securities
$
$
$
Equity Securities
Equity securities consist of a $
three private equity funds. Equity securities are included in “other assets” on the Consolidated Balance Sheets.
The Company elected a measurement alternative for the three private equity funds that allows the securities to remain at cost until
an impairment is identified or an observable price change for an identical or similar investment of the same issuer occurs. Impairment is
recorded when there is evidence that the expected fair value of the investment has declined to below the recorded cost. No such events
occurred during the three-month period ended March 31, 2022.
The following is a summary of the unrealized and realized losses recognized in net income on equity securities:
Three Months Ended
March 31,
2022
2021
(Dollars in thousands)
Net losses recognized during the reporting period on equity securities
$
(103 )
$
(39 )
Less: net gains recognized during the reporting period on equity securities sold during
the reporting period
Unrealized losses recognized during the reporting period on equity securities still held at
the reporting date
$
(103 )
$
(39 )
Notes to Condensed Consolidated Financial Statements
(unaudited)
18
Note 4: Loans and Allowance for Credit Losses (“ACL”)
Loan Portfolio Segments
Categories of loans at March 31, 2022 and December 31, 2021 include:
March 31, 2022
December 31, 2021
(Dollars in thousands)
Commercial
$
$
Commercial lines of credit
Energy
Commercial real estate
Construction and land development
Residential real estate
Multifamily real estate
Consumer
Loans, net of unearned fees
Less: allowance for credit losses
(1)
Loans, net
$
$
(1)
and Summary of Significant Accounting Policies.”
Accrued interest of $
Balance Sheets is excluded from the amortized cost basis disclosed in the above table.
The Company aggregates the loan portfolio by similar credit risk characteristics. The loan segments are described in additional
detail below:
●
Commercial
and expansions. Loan terms typically require principal and interest payments that decrease the outstanding loan balance.
Repayment is primarily from the cash flow of a borrower’s principal business operation. Credit risk is driven by
creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.
The category also includes the remaining PPP loans outstanding. These loans were established by the Coronavirus Aid,
Relief, and Economic Security Act which authorized forgivable loans to small businesses to pay their employees during
the COVID-19 pandemic. The loans are
repayment is primarily dependent on the borrower’s cash flow or SBA repayment approval.
●
Commercial Lines of Credit
– The category includes lines of credit to commercial customers for working capital needs.
The loan terms typically require interest-only payments, mature in one year, and require the full balance paid-off at
maturity. Lines of credit allow the borrower to drawdown and repay the line of credit based on the customer’s cash flow
needs. Repayment is primarily from the operating cash flow of the business. Credit risk is driven by creditworthiness of
a borrower and the economic conditions that impact the cash flow stability from business operations.
●
Energy
exploration and production activities, and acquisitions. The loans are repaid primarily from the conversion of crude oil
and natural gas to cash. Credit risk is driven by creditworthiness of a borrower and the economic conditions that impact
the cash flow stability from business operations. Energy loans are typically collateralized with the underlying oil and gas
reserves.
●
Commercial Real Estate
these loans is generally dependent on the successful operations of the property securing the loan or the business
conducted on the property securing the loan. These are viewed primarily as cash flow loans and secondarily as loans
Notes to Condensed Consolidated Financial Statements
(unaudited)
19
secured by real estate. Credit risk may be impacted by the creditworthiness of a borrower, property values and the local
economies in the borrower’s market areas.
●
Construction and Land Development
estimated value of the completed project and include independent appraisal reviews and a financial analysis of the
developers and property owners. Sources of repayment include permanent loans, sales of developed property or an
interim loan commitment from the Company until permanent financing is obtained. These loans are higher risk than
other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic
conditions and the availability of long-term financing. Credit risk may be impacted by the creditworthiness of a
borrower, property values and the local economies in the borrower’s market areas.
●
Residential Real Estate
- The category includes loans that are generally secured by owner-occupied 1-4 family
residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers.
Credit risk in these loans can be impacted by economic conditions within or outside the borrower’s market areas that
might impact either property values or a borrower’s personal income.
●
Multifamily Real Estate -
The category includes loans that are generally secured by multifamily properties. Repayment
of these loans is primarily dependent on occupancy rates and the personal income of the tenants. Credit risk in these
loans can be impacted by economic conditions within or outside the borrower’s market areas that might impact either
property values or the tenants’ personal income.
●
Consumer
- The category includes revolving lines of credit and various term loans such as automobile loans and loans
for other personal purposes. Repayment is primarily dependent on the personal income and credit rating of the
borrowers. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions
in the borrower’s market area) and the creditworthiness of a borrower.
Allowance for Credit Losses
The Company established a CECL committee that meets at least quarterly to oversee the Allowance for Credit Loss methodology.
The committee estimates the ACL using relevant available information, from internal and external sources, relating to past events,
current conditions, and reasonable and supportable forecasts. The ACL represents the Company’s current estimate of lifetime credit
losses inherent in the loan portfolio at the balance sheet date. The ACL is adjusted for expected prepayments when appropriate and
excludes expected extensions, renewals, and modifications.
The ACL is the sum of three components: (i) asset specific / individual loan reserves; (ii) quantitative (formulaic or pooled)
reserves; and (iii) qualitative (judgmental) reserves.
Asset Specific -
individually evaluated. Individual reserves are calculated for loans that are risk-rated substandard and on non-accrual and loans that are
risk-rated doubtful or loss that are greater than a defined dollar threshold. In addition, troubled debt restructurings (“TDRs”) are also
individually evaluated. Reserves on asset specific loans may be based on collateral, for collateral-dependent loans, or on quantitative and
qualitative factors, including expected cash flow, market sentiment, and guarantor support.
Quantitative
- The Company used the cohort method, which identifies and captures the balance of a pool of loans with similar
risk characteristics as of a particular time to form a cohort. For example, the outstanding commercial loans and commercial lines of
credit loan segments as of quarter-end are considered cohorts. The cohort is then tracked for losses over the remaining life of loans or
until the pool is exhausted. The Company used a lookback period of approximately six-years to establish the cohort population. By using
the historical data timeframe, the Company can establish a historical loss factor for each of its loan segments and adjust the losses with
qualitative and forecast factors.
Qualitative
primarily uses the following qualitative factors:
◾
The nature and volume of changes in risk ratings;
◾
The volume and severity of past due loans;
Notes to Condensed Consolidated Financial Statements
(unaudited)
20
◾
The volume of nonaccrual loans;
◾
The nature and volume of the loan portfolio, including the existence, growth, and effect of any concentrations of credit;
◾
Changes in the Institute of Supply Management’s Purchasing Manager Indices (“PMI”) for services and manufacturing;
◾
Changes in collateral values;
◾
Changes in lending policies, procedures, and quality of loan reviews;
◾
Changes in lending staff; and
◾
Changes in competition, legal and regulatory environments
In addition to the current condition, qualitative adjustments, the Company uses the Federal Reserve’s unemployment forecast to
adjust the ACL based on forward looking guidance. The Federal Reserve’s unemployment forecast extends three-years and is eventually
reverted to the mean of six percent by year 10.
Drivers of Quarterly Change in the ACL
The ACL declined by $
-
A $
improved collateral valuation that resulted in a $
a commercial real estate loan charged down and two energy loans that paid down their outstanding balance, resulting in a $
million decrease to the required reserve.
-
A $
commercial real estate loans and required a $
-
A $
nonaccruals, driven by the energy portfolio that decreased the required ACL by $
-
$
loan impacted by low prices in 2020 and 2021, and $
driven by $
-
The unemployment forecast provided by the Federal Reserve in March 2022 was consistent with the previously presented
forecast. As a result, no forward-looking adjustment was made during the first quarter of 2022.
Credit Quality Indicators
Internal Credit Risk Ratings
The Company uses a weighted average risk rating factor to adjust the historical loss factors for current events. Risk ratings
incorporate the criteria utilized by regulatory authorities to describe criticized assets, but separate various levels of risk concentrated
within the regulatory “Pass” category. Risk ratings are established for loans at origination and are monitored on an ongoing basis. The
rating assigned to a loan reflects the risks posed by the borrower’s expected performance and the transaction’s structure. Performance
metrics used to determine a risk rating include, but are not limited to, cash flow adequacy, liquidity, and collateral. A description of the
loan risk ratings follows:
Loan Grades
●
Pass (risk rating 1-4)
that generally maintain good liquidity and financial condition or the credit is currently protected with sales trends
remaining flat or declining. Most ratios compare favorably with industry norms and Company policies. Debt is
programmed and timely repayment is expected.
●
Special Mention (risk rating 5)
an imbalanced position in their balance sheet that has not reached a point where repayment is jeopardized. Credits are
currently protected but, if left uncorrected, the potential weaknesses may result in deterioration of the repayment
Notes to Condensed Consolidated Financial Statements
(unaudited)
21
prospects for the credit or in the Company’s credit or lien position at a future date. These credits are not adversely
classified and do not expose the Company to enough risk to warrant adverse classification.
●
Substandard (risk rating 6)
jeopardize repayment. Credits are inadequately protected by the current worth and paying capacity of the obligor or of
the collateral pledged. A distinct possibility exists that the Company will sustain some loss if deficiencies are not
corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in
individual assets classified substandard. Substandard loans include both performing and nonperforming loans and are
broken out in the table below.
●
Doubtful (risk rating 7)
- The category includes borrowers that exhibit weaknesses inherent in a substandard credit and
characteristics that these weaknesses make collection or liquidation in full highly questionable or improbable based on
existing facts, conditions and values. Because of reasonably specific pending factors, which may work to the advantage
and strengthening of the assets, classification as a loss is deferred until its more exact status may be determined.
●
Loss (risk rating 8)
- Credits which are considered uncollectible or of such little value that their continuance as a
bankable asset is not warranted.
Notes to Condensed Consolidated Financial Statements (unaudited)
22
The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating categories and loan segments:
As of March 31, 2022
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Commercial
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Commercial lines of credit
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Energy
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
23
As of March 31, 2022
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Commercial real estate
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Construction and land development
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Residential real estate
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
24
As of March 31, 2022
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Multifamily real estate
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Consumer
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Total
Pass
$
$
$
$
$
$
$
$
$
Special mention
Substandard - accrual
Substandard - non-
accrual
Doubtful
Total
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
25
Loan Portfolio Aging Analysis
The following tables present the Company’s loan portfolio aging analysis as of March 31, 2022:
As of March 31, 2022
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Commercial
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Commercial lines of credit
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Energy
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
26
As of March 31, 2022
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Commercial real estate
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Construction and land development
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Residential real estate
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
27
As of March 31, 2022
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Multifamily real estate
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Consumer
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Total
30-59 days
$
$
$
$
$
$
$
$
$
60-89 days
Greater than 90 days
Total past due
Current
Total
$
$
$
$
$
$
$
$
$
Greater than 90 days
and accruing
$
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements (unaudited)
28
Non-accrual Loan Analysis
Non-accrual loans are loans for which the Company does not record interest income. The accrual of interest on loans is discontinued at the time the loan is 90 days past due
unless the credit is well secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at
an earlier date, if collection of principal or interest is considered doubtful. Loans are returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured. The following table presents the Company’s non-accrual loans by loan segments:
As of March 31, 2022
Amortized Cost Basis by Origination Year and On Nonaccrual
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted
to term
loans
Total
Nonaccrual
Loans
Nonaccrual
Loans with
no related
Allowance
(Dollars in thousands)
Commercial
$
$
$
$
$
$
$
$
$
$
Commercial lines of credit
Energy
Commercial real estate
Construction and land
development
Residential real estate
Multifamily real estate
Consumer
Total
$
$
$
$
$
$
$
$
$
$
Interest income recognized on nonaccrual loans was $
Notes to Condensed Consolidated Financial Statements (unaudited)
29
Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses and allowance for credit losses on off-balance sheet credit exposures by portfolio segment for the
three-month period ended March 31, 2022:
For the Three Months Ended March 31, 2022
Commercial
(1)
Commercial
Lines of
Credit
(1)
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
Real
Estate
(2)
Multifamily
Real
Estate
(2)
Consumer
Total
(Dollars in thousands)
Allowance for Credit Losses:
Beginning balance, prior to
adoption of ASU 2016-13
$
$
$
$
$
$
$
$
$
Impact of ASU 2016-13
adoption
(10,213 )
(39 )
(186 )
(83 )
(2,552 )
(5 )
(1,747 )
Charge-offs
(209 )
(1,221 )
(1,067 )
(1,102 )
(13 )
(3,612 )
Recoveries
Provision (credit)
(704 )
(2,370 )
(123 )
(316 )
Ending balance
$
$
$
$
$
$
$
$
$
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:
Beginning balance, prior to
adoption of ASU 2016-13
$
$
$
$
$
$
$
$
$
Impact of ASU 2016-13
adoption
Provision (credit)
(41 )
(7 )
(400 )
(1 )
(21 )
(309 )
Ending balance
$
$
$
$
$
$
$
$
$
(1)
(2)
segment.
Notes to Condensed Consolidated Financial Statements
(unaudited)
30
Collateral Dependent Loans:
Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or
sale of the collateral and the borrower is experiencing financial difficulty. The following table presents the amortized cost balance of
loans considered collateral dependent by loan segment and collateral type as of March 31, 2022:
As of March 31, 2022
Loan Segment and Collateral Description
Amortized Cost of
Collateral Dependent
Loans
Related Allowance for
Credit Losses
Amortized Cost of
Collateral Dependent
Loans with no related
Allowance
(Dollars in thousands)
Commercial
All business assets
$
$
$
Commercial lines of credit
All business assets
Energy
Oil and natural gas properties
$
$
$
Troubled Debt Restructurings (“TDR”)
TDRs are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession,
excluding loan modifications as a result of the COVID-19 pandemic. The modification of terms typically includes the extension of
maturity, reduction or deferment of monthly payment, or reduction of the stated interest rate.
For the three-month periods ended March 31, 2022 and 2021,
outstanding balance of TDRs was $
Disclosures under Previously Applicable GAAP
The following disclosures are presented under previously applicable GAAP. The description of the general characteristics of the
loan rating categories is as described above. The following table presents the credit risk profile of the Company’s loan portfolio based on
an internal rating category and portfolio segment as of December 31, 2021:
As of December 31, 2021
Pass
Special
Mention
Substandard
Performing
Substandard
Nonperforming
Doubtful
Loss
Total
(Dollars in thousands)
Commercial
$
$
$
$
$
$
$
Energy
Commercial real
estate
Construction and
land development
Residential and
multifamily real
estate
PPP
Consumer
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
31
The following table presents the Company’s loan portfolio aging analysis of the recorded investment in loans as of December 31,
2021:
As of December 31, 2021
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
More
Total Past
Due
Current
Total Loans
Receivable
Loans >= 90
Days and
Accruing
(Dollars in thousands)
Commercial
$
$
$
$
$
$
$
Energy
Commercial real estate
Construction and land
development
Residential and multifamily
real estate
PPP
Consumer
$
$
$
$
$
$
$
The following table presents the Company’s loans on non-accrual as of December 31, 2021:
December 31, 2021
(Dollars in thousands)
Commercial
$
Energy
Commercial real estate
Construction and land development
Residential and multifamily real estate
PPP
Consumer
Total non-accrual loans
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
32
The following table presents the allowance for loan losses by portfolio segment and disaggregated based on the Company’s
impairment methodology:
As of December 31, 2021
Commercial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Period end allowance for loan losses allocated to:
Individually
evaluated for
impairment
$
$
$
$
$
$
$
$
Collectively
evaluated for
impairment
Ending balance
$
$
$
$
$
$
$
$
Allocated to loans:
Individually
evaluated for
impairment
$
$
$
$
$
$
$
$
Collectively
evaluated for
impairment
Ending balance
$
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
33
A loan is considered impaired when based on current information and events, it is probable the Company will be unable to collect
all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans but
also include loans modified in TDRs where concessions have been granted to borrowers experiencing financial difficulties. The intent of
concessions is to maximize collection. The following table presents loans individually evaluated for impairment:
As of December 31, 2021
Recorded Balance
Unpaid Principal Balance
Specific Allowance
(Dollars in thousands)
Commercial
$
$
$
-
-
Commercial real estate
-
-
Residential and multifamily real estate
-
-
Consumer
-
Commercial
Commercial real estate
Residential and multifamily real estate
-
Consumer
Commercial
Commercial real estate
Residential and multifamily real estate
Consumer
Total interest income recognized during the three-month period ended March 31, 2021 for impaired loans was $
The three-month average balance of impaired loans for the period ended March 31, 2021 was $
Notes to Condensed Consolidated Financial Statements
(unaudited)
34
The following table presents the activity in the allowance for loan losses by portfolio segment for the three-month period ended
March 31, 2021:
Three Months Ended March 31, 2021
Commercial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Allowance for loan losses:
Beginning
balance
$
$
$
$
$
$
$
$
Provision
(1,745 )
(160 )
Charge-offs
(8,266 )
(8,266 )
Recoveries
Ending balance
$
$
$
$
$
$
$
$
Allowance for Credit Losses (“ACL”) on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses for off-balance sheet credit exposures unless the obligation is unconditionally
cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The
estimate is calculated for each loan segment and includes consideration of the likelihood that funding will occur and an estimate of the
expected credit losses on commitments expected to be funded over its estimated life. For each pool of contractual obligations expected
to be funded, the Company uses the reserve rate established for the related loan pools. The $
balance sheet credit exposures at March 31, 2022 is included in “interest payable and other liabilities” on the balance sheet.
The following categories of off-balance sheet credit exposures have been identified:
Loan commitments – include revolving lines of credit, non-revolving lines of credit, and loans approved that are not yet funded.
Risks inherent to revolving lines of credit often are related to the susceptibility of an individual or business experiencing
unpredictable cash flow or financial troubles, thus leading to payment default. The primary risk associated with non-revolving
lines of credit is the diversion of funds for other expenditures.
Letters of credit – are primarily established to provide assurance to the beneficiary that the applicant will perform certain
obligations arising out of a separate transaction between the beneficiary and applicant. If the obligation is not met, it gives the
beneficiary the right to draw on the letter of credit.
Note 5: Derivatives and Hedging
The Company is exposed to certain risks arising from both its business operations and economic conditions, including interest
rate, liquidity, and credit risk. The Company uses derivative financial instruments as part of its risk management activities to manage
exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value
of which are determined by interest rates.
Cash Flow Hedges of Interest Rate Risk
Notes to Condensed Consolidated Financial Statements
(unaudited)
35
The Company uses interest rate derivatives to add stability to interest expense and to manage its exposure to interest rate
movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange
for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
During 2021, the Company entered into forward-looking derivatives that will be used to hedge variable cash flows associated with
variable-rate funding. These
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded
in Accumulated Other Comprehensive Income (“AOCI”) and subsequently reclassified into interest expense in the same period(s)
during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest
expense as interest payments are made on the Company’s related, variable -rate debt. During the next twelve months, the Company
estimates that an additional $
The Company’s derivative financial instruments are not effective until 2023. As a result, the derivative financial instrument s did
not impact the Consolidated Statement of Income for the three-month period ended March 31, 2022.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service provided to clients. The Company executes
interest rate swaps with customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously
hedged by offsetting derivatives that the Company executes with a third-party, such that the Company minimizes its net risk exposure
resulting from such transactions. Interest rate derivatives associated with this program do not meet the strict hedge accounting
requirements and changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in
earnings.
Swap fees earned upon origination and credit valuation adjustments that represent the risk of a counterparty’s default are reported
on the Consolidated Statements of Income as swap fee income, net. The effect of the Company’s derivative financial instruments gain
(loss) are reported on the Consolidated Statements of Cash Flows within “other assets” and “other liabilities”.
These
2021, respectively.
Notes to Condensed Consolidated Financial Statements
(unaudited)
36
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments and their classification on the balance
sheet as of March 31, 2022 and December 31, 2021:
Asset Derivatives
Liability Derivatives
Balance Sheet
March 31,
December 31,
Balance Sheet
March 31,
December 31,
Asset
Derivatives
2022
2021
Location
2022
2021
(Dollars in thousands)
Interest rate products:
Derivatives not
designated as hedging
instruments
Other assets
$
$
Interest payable
and other
liabilities
$
$
Derivatives
designated as hedging
instruments
Other assets
Interest payable
and other
liabilities
Total
$
$
$
$
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income as of March 31,
2022. The Company had no cash flow hedges for the three-months ended March 31, 2021.
March 31, 2022
Gain or
(Loss)
Recognized
in OCI on
Derivative
Gain or
(Loss)
Recognized
in OCI
Included
Component
Gain or
(Loss)
Recognized
in OCI
Excluded
Component
Location of
Gain or (Loss)
Recognized
from
Accumulated
Other
Comprehensive
Income into
Income
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Included
Component
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
Excluded
Component
(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products
$
$
$
Interest expense
$
$
$
Note 6: Time Deposits and Borrowings
The scheduled maturities, excluding interest, of the Company’s borrowings at March 31, 2022 were as follows:
March 31, 2022
Within One
Year
One to Two
Years
Two to
Three Years
Three to
Four Years
Four to Five
Years
After Five
Years
Total
(Dollars in thousands)
Time deposits
$
$
$
$
$
$
$
FHLB borrowings
Trust preferred securities
(1)
$
$
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
37
(1)
The contract value of the trust preferred securities is $
Note 7: Change in Accumulated Other Comprehensive Income (Loss) (“AOCI”)
Amounts reclassified from AOCI and the affected line items in the Condensed Consolidated Statements of Income during the
three-month periods ended March 31, 2022 and 2021, were as follows:
Three Months Ended
March 31,
Affected Line Item in the
2022
2021
Statements of Income
(Dollars in thousands)
Unrealized gains (losses) on available-for-sale
securities
$
(26 )
$
Gain (loss) on sale of available-
for-sale securities
Less: tax expense (benefit) effect
(6 )
Income tax expense (benefit)
Net reclassified amount
$
(20 )
$
Note 8: Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Management believes that,
as of March 31, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject.
The capital rules require the Company to maintain a
% capital conservation buffer with respect to Common Equity Tier I
capital, Tier I capital to risk-weighted assets, and total capital to risk-weighted assets, which is included in the column “Minimum
Capital Required - Basel III” within the table below. A financial institution with a conservation buffer of less than the required amount is
subject to limitations on capital distributions, including dividend payments and stock repurchases, as well as certain discretionary bonus
payments to executive officers.
The Company and the Bank opted to exclude AOCI from the regulatory capital calculations. As a result, change in AOCI,
including the recent decrease in the available-for-sale securities portfolio, net of tax, did not impact the Company’s or Bank’s capital
ratios.
Notes to Condensed Consolidated Financial Statements
(unaudited)
38
The Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2022 and December 31, 2021 are presented in
the following table:
Actual
Minimum Capital
Required - Basel III
Required to be Considered
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
March 31, 2022
Total Capital to Risk-Weighted Assets
Consolidated
$
%
$
%
N/A
Bank
$
%
Tier I Capital to Risk-Weighted Assets
Consolidated
N/A
N/A
Bank
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
N/A
Bank
Tier I Capital to Average Assets
Consolidated
N/A
N/A
Bank
$
%
$
%
$
%
December 31, 2021
Total Capital to Risk-Weighted Assets
Consolidated
$
%
$
%
N/A
N/A
Bank
$
%
Tier I Capital to Risk-Weighted Assets
Consolidated
N/A
Bank
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
N/A
N/A
Bank
Tier I Capital to Average Assets
Consolidated
N/A
Bank
$
%
$
%
$
%
Note 9: Stock-Based Compensation
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights under the
2018 Omnibus Equity Incentive Plan (“Omnibus Plan”). The Omnibus Plan will expire on the tenth anniversary of its effective date. In
addition, the Company has an Employee Stock Purchase Plan that was reinstated during the third quarter of 2020. The aggregate number
of shares authorized for future issuance under the Omnibus Plan is
The table below summarizes the stock-based compensation for the three-month periods ended March 31, 2022 and 2021:
Three Months Ended
March 31,
2022
2021
(Dollars in thousands)
Stock appreciation rights
$
$
Performance-based stock awards
(266 )
Restricted stock units and awards
Employee stock purchase plan
Total stock-based compensation
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
39
Performance-Based Stock Awards (“PBSAs”)
The Company awards PBSAs to key officers of the Company. The performance -based shares typically cliff-vest at the end of
shares issuable under each performance award is the product of the award target and the award payout percentage given the level of
achievement. The award payout percentages by level of achievement range between
% of target and
% of target.
During the three-month period ended March 31, 2022, the Company granted
three-year
The following table summarizes the status of and changes in the performance-based awards:
Performance-Based Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2022
$
Granted
Vested
Forfeited
(24,944 )
Unvested, March 31, 2022
$
Unrecognized stock-based compensation related to the performance awards issued through March 31, 2022 was $
expected to be recognized over
Restricted Stock Units (“RSUs”) and Restricted Stock Awards (“RSAs”)
The Company issues RSUs and RSAs to provide incentives to key officers, employees, and nonemployee directors. Awards are
typically granted annually as determined by the Compensation Committee. The service-based RSUs typically vest in equal amounts over
three years. The service-based RSAs typically cliff-vest after
.
The following table summarizes the status of and changes in the RSUs and RSAs:
Restricted Stock Units and Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2022
$
Granted
Vested
(137,224 )
Forfeited
(10,441 )
Unvested, March 31, 2022
$
Unrecognized stock-based compensation related to the RSUs and RSAs issued through March 31, 2022 was $
expected to be recognized over
Notes to Condensed Consolidated Financial Statements
(unaudited)
40
Note 10: Income Tax
An income tax expense reconciliation at the statutory rate to the Company’s actual income tax expense is shown below:
Three Months Ended
March 31,
2022
2021
(Dollars in thousands)
Computed at the statutory rate (
%)
$
$
Increase (decrease) resulting from
Tax-exempt income
(854 )
(790 )
Nondeductible expenses
State income taxes
Equity based compensation
(169 )
Other adjustments
Actual tax expense
$
$
The tax effects of temporary differences related to deferred taxes shown on the Consolidated Balance Sheets are presented below:
March 31, 2022
December 31, 2021
(Dollars in thousands)
Deferred tax assets
Net unrealized loss on securities available-for-sale
$
$
Allowance for credit losses
Lease incentive
Loan fees
Accrued expenses
Deferred compensation
State tax credit
Other
Total deferred tax asset
Deferred tax liability
Net unrealized gain on securities available-for-sale
(6,967 )
FHLB stock basis
(689 )
(757 )
Premises and equipment
(2,470 )
(2,602 )
Other
(969 )
(1,229 )
Total deferred tax liability
(4,128 )
(11,555 )
Net deferred tax asset
$
$
Note 11: Disclosures about Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use
of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1
Level 2
markets that are not active; or other inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
Level 3
Notes to Condensed Consolidated Financial Statements
(unaudited)
41
Recurring Measurements
The following list presents the assets and liabilities recognized in the accompanying Condensed Consolidated Balance Sheets
measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at
March 31, 2022 and December 31, 2021:
Fair Value Description
Valuation
Hierarchy
Level
Where Fair
Value Balance
Can Be Found
Available-for-
Sale Securities and
CRA Equity Security
Where quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. If quoted market prices
are not available, then fair values are estimated by using quoted prices of
securities with similar characteristics or independent asset pricing services
and pricing models, the inputs of which are market-based or independently
sourced market parameters, including, but not limited to, yield curves,
interest rates, volatilities, prepayments, defaults, cumulative loss projections
and cash flows.
Level 2
Note 3:
Securities
Derivatives
Fair value of the interest rate swaps is obtained from independent pricing
services based on quoted market prices for similar derivative contracts.
Level 2
Note 5:
Derivatives and
Hedging
Nonrecurring Measurements
The following tables present assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in
which the fair value measurements fall at March 31, 2022 and December 31, 2021:
March 31, 2022
Fair Value Measurements Using
Fair Value
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Collateral-dependent loans
$
$
$
$
Foreclosed assets held-for-sale
$
$
$
$
December 31, 2021
Fair Value Measurements Using
Fair Value
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Collateral-dependent impaired loans
$
$
$
$
Foreclosed assets held-for-sale
$
$
$
$
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring
basis and recognized in the accompanying Consolidated Balance Sheets.
Collateral-Dependent Loans, Net of ACL
The estimated fair value of collateral-dependent loans is based on the appraised fair value of the collateral, less estimated cost to
sell. If the fair value of the collateral is below the loan’s amortized cost, the ACL is netted against the loan balance. Collateral-dependent
loans are classified within Level 3 of the fair value hierarchy.
Notes to Condensed Consolidated Financial Statements
(unaudited)
42
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other
factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral dependent loans are
obtained when the loan is determined to be collateral dependent and subsequently as deemed necessary by the Office of the Chief Credit
Officer.
Appraisals are reviewed for accuracy and consistency by the Office of the Chief Credit Officer. Appraisers are selected from the
list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability
and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates
are developed by the Office of the Chief Credit Officer by comparison to historical results.
Foreclosed Assets Held-for-Sale
The fair value of foreclosed assets-held-for-sale is based on the appraised fair value of the collateral, less estimated cost to sell.
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value
measurements at March 31, 2022 and December 31, 2021:
March 31, 2022
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
%
-
%
Collateral dependent loans
(
)%
$
Market comparable
properties
Marketability
discount
Foreclosed assets held-for-sale
(
)%
December 31, 2021
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
%
-
%
Collateral-dependent impaired loans
(
)%
$
Market comparable
properties
Marketability
discount
Foreclosed assets held-for-sale
(
)%
Notes to Condensed Consolidated Financial Statements
(unaudited)
43
The following tables present the estimated fair values of the Company’s financial instruments at March 31, 2022 and
December 31, 2021:
March 31, 2022
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
$
$
$
$
Available-for-sale securities
Loans, net of allowance for credit losses
Restricted equity securities
Interest receivable
Equity securities
Derivative assets
$
$
$
$
$
Financial Liabilities
Deposits
$
$
$
$
$
Federal Home Loan Bank advances
Other borrowings
Interest payable
Derivative liabilities
$
$
$
$
$
December 31, 2021
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
Total
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
$
$
$
$
Available-for-sale securities
Loans, net of allowance for loan losses
Restricted equity securities
Interest receivable
Equity securities
Derivative assets
$
$
$
$
$
Financial Liabilities
Deposits
$
$
$
$
$
Federal Home Loan Bank advances
Other borrowings
Interest payable
Derivative liabilities
$
$
$
$
$
Notes to Condensed Consolidated Financial Statements
(unaudited)
44
Note 12: Commitments and Credit Risk
Commitments
The Company had the following commitments at March 31, 2022 and December 31, 2021:
March 31, 2022
December 31, 2021
(Dollars in thousands)
Commitments to originate loans
$
$
Standby letters of credit
Lines of credit
Future lease commitments
Commitments related to investment fund
$
$
Note 13: Legal and Regulatory Proceedings
General Litigation
The Company establishes reserves for litigation-related matters that arise in the ordinary course of business activities when it is
probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. If
the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and
material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which
case the nature of the guarantee would be disclosed.
The Company is in preliminary settlement negotiations in connection with a former employee’s departure. At this time, a range of
loss is not estimatable. The Company currently expects that a portion of any settlement will be paid by the Company’s insurance
carriers.
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of
management the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the
consolidated financial position, results of operations and cash flows of the Company.
Note 14: Leases
The Company’s operating leases primarily include bank branches located in Kansas City, Missouri; Tulsa, Oklahoma; Dallas,
Texas; Frisco, Texas; and Phoenix, Arizona. The remaining lease terms range from
renew. Renewal terms can extend the lease term between
. The exercise of lease renewal options is at the
Company’s sole discretion. When it is reasonably certain that the Company will exercise its option to renew or extend the lease term,
that option is included in the estimated value of the right of use (“ROU”) asset and lease liability. The Company’s lease agreements do
not contain any material residual value guarantees or material restrictive covenants . As of March 31, 2022, the Company’s leases are
classified as operating leases.
Under ASC 842, a modified retrospective transition approach is required, applying the new standard to all leases existing at the
date of initial application. The Company chose to use the adoption date of January 1, 2022, for ASC 842. As such, all periods presented
after January 1, 2022, are under ASC 842 whereas periods presented prior to January 1, 2022, are in accordance with prior lease
accounting of ASC 840. Financial information was not updated and the disclosures required under ASC 842 were not provided for dates
and periods before January 1, 2022.
Notes to Condensed Consolidated Financial Statements
(unaudited)
45
The Company’s right to use an asset over the life of a lease is recorded as an ROU asset, is included in other assets on the
Consolidated Balance Sheets, and was $
such as initial direct costs paid or incentives received. The Company recorded a lease liability in interest payable and other liabilities on
the Consolidated Balance Sheets of $
The Company was unable to determine the implicit rate in the leases and used the incremental borrowing rate instead. The
Company used the FHLB yield curve on the lease commencement date and selected the rate closest to the remaining lease term. The
remaining weighted-average lease term is
%.
The following table presents components of operating lease expense in the accompanying consolidated statements of income for
the three-months ended March 31, 2022:
For the Three Months Ended
(Dollars in thousands)
Operating lease expense
$
Variable lease expense
Short-term lease expense
Total lease expense
$
Future minimum commitments due under these lease agreements as of March 31, 2022 are as follows:
Operating Leases
(Dollars in thousands)
Remainder of 2022
$
2023
2024
2025
2026
Thereafter
Total lease payments
$
Less imputed interest
Total
$
Supplemental cash flow information –
Operating cash flows paid for operating lease amounts included in the measurement of
lease liabilities was $
Company did
t record any ROU assets that were exchanged for operating lease liabilities.
Note 15: Stock Warrants
During the three-month period ended March 31, 2022,
The Company had
share as of March 31, 2022 and December 31, 2021, respectively. The
of $
46
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes
and with the statistical information and financial data appearing in this report as well as in the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2021 filed with the Securities and Exchange Commission (“SEC”) on February 28, 2022 (the
“2021 Form 10-K”). Results of operations for the three-month period ended March 31, 2022 are not necessarily indicative of results to
be attained for any other period. Certain statements in this report contain forward-looking statements regarding our plans, objectives,
beliefs, expectations, representations, and projections. See “Forward-Looking Information” which is incorporated herein by reference.
Actual results could differ materially from the anticipated results and other expectations expressed in our forward-looking statements
because of several factors, including but not limited to those discussed in Item 1A – "Risk Factors" in the 2021 Form 10-K.
Unless we state otherwise or the context otherwise requires, references below to “we,” “our,” “us,” “ourselves,” “our company,”
and the “Company” refer to CrossFirst Bankshares, Inc., and its consolidated subsidiaries. References to “CrossFirst Bank” and the
“Bank” refer to CrossFirst Bank, our wholly owned consolidated bank subsidiary.
First Quarter 2022 Highlights
During the first quarter ended March 31, 2022, we accomplished the following:
●
$5.5 billion of assets with net income for the quarter ended March 31, 2022 of $16.8 million, an increase of $4.8 million or
40% compared to the first quarter of 2021;
●
Implemented CECL on January 1, 2022, with a combined allowance for credit losses (“ACL”) and ACL on off-balance sheet
credit exposures totaling $62 million or 1.45% of outstanding loans , compared to $60 million or 1.38% of outstanding loans
at March 31, 2022;
●
Return on Average Assets of 1.23% and a Return on Equity of 10.44% for the quarter ended March 31, 2022;
●
Net Interest Margin (Fully Tax-Equivalent) of 3.29%
(1)
(1)
same quarter last year;
●
$93 million of loan growth from the previous quarter;
●
Book value per share of $12.53 at March 31, 2022 compared to $12.17 at March 31, 2021.
(1)
The Company modified the yield calculation. Refer to the section “Update to Net Interest Margin Methodology” below for additional information.
Credit Quality and Implementation of the Current Expected Credit Loss (“CECL”) Methodology
The Company implemented the CECL model as of January 1, 2022. Refer to “Note 1: Nature of Operations and Summary of
Significant Accounting Policies” and “Note 4: Loans and Allowance for Credit Losses (“ACL”)” within the Notes to Condensed
Consolidated Financial Statements (unaudited) for details regarding the transition, including the impact to the financial statements. The
CECL model compared to the incurred loss model may accelerate the provision for credit losses if the Company’s loan portfolio
continues to grow. In addition, positive (negative) forward-looking indicators may decrease (increase) the required provision for credit
losses.
Credit quality metrics generally improved during the first quarter of 2022 as classified loans decreased $5 million to $73 million
at March 31, 2022, including a $5 million decline in classified energy loans. Nonperforming assets increased to $36 million or 0.64% of
total assets due primarily to a commercial loan that was placed on nonaccrual during the three-month period ended March 31, 2022. Net
charge-offs for the three-month period ended March 31, 2022 were $1 million, or 0.10% of average loans. The Company currently
expects net charge-offs to average loans to remain in the range of 0.13% to 0.15% for the remainder of 2022.
The Company continues to monitor the U.S. economic indicators, including the inflation rate, commodity prices, interest rates,
and potential supply chain disruptions and the impact it may have on the Company’s markets, clients, and prospects. The Company is
47
monitoring the impact of a rising interest rate environment on the commercial real estate market and enterprise and leverage loans that is
currently mitigated by low debt-to-equity ratios. As of March 31, 2022, the Company did not identify any systemic issues within its
loan portfolio that would significantly affect the credit quality of the loan portfolio.
Update to Net Interest Margin Methodology
The Company modified the yield calculation on the available-for-sale security portfolio to better conform to peer disclosures. All
earning-asset yields and net interest margins presented were retroactively updated for the change in methodology. The following
changes were made:
◾
The average unrealized gain (loss) on available-for-sale securities balance was removed from the security lines and placed in
other non-interest earning assets.
◾
The annualization method was changed from Actual/Actual to 30/360 for the security yields.
Impact to Yield
March 31,
December 31,
September 30,
June 30,
March 31,
Lines Impacted
2022
2021
2021
2021
2021
Previous calculation
Yield on securities - taxable
2.20
%
2.11
%
1.96
%
1.96
%
1.71
%
Yield on securities - tax-exempt
(1)
3.31
3.17
3.20
3.34
3.43
Total securities yield
(1)
3.00
2.89
2.87
2.93
2.89
Yield on interest-earning assets
(1)
3.64
3.70
3.62
3.57
3.50
Net interest spread
(1)
3.25
3.22
3.16
3.08
2.94
Net interest margin
(1)
3.29
3.28
3.20
3.12
3.00
As calculated going forward
Yield on securities - taxable
2.15
2.14
2.01
1.99
1.73
Yield on securities - tax-exempt
(1)
3.35
3.35
3.43
3.54
3.61
Total securities yield
(1)
3.00
3.02
3.04
3.07
3.01
Yield on interest-earning assets
(1)
3.64
3.72
3.64
3.59
3.52
Net interest spread
(1)
3.25
3.24
3.18
3.10
2.96
Net interest margin
(1)
3.29
3.30
3.23
3.14
3.01
Change
Yield on securities - taxable
(0.05)
0.03
0.05
0.03
0.02
Yield on securities - tax-exempt
(1)
0.04
0.18
0.23
0.20
0.18
Total securities yield
(1)
-
0.13
0.17
0.14
0.12
Yield on interest-earning assets
(1)
-
0.02
0.02
0.02
0.02
Net interest spread
(1)
-
0.02
0.02
0.02
0.02
Net interest margin
(1)
-
%
0.02
%
0.03
%
0.02
%
0.01
%
(1)
incremental tax rate used is 21.0%.
The Company believes the new calculation provides better insight into why the security yields and net interest margin changed
period-to-period.
Update on the COVID-19 Global Pandemic (“COVID-19”) Impact
The COVID-19 pandemic has caused, and may continue to cause, economic uncertainty and a disruption to the financial markets,
the duration and extent of which is not currently known. A discussion of the impact of the COVID-19 pandemic on the Company and its
operations is provided below.
Paycheck Protection Program (“PPP”) Lending Facility and Loans
The PPP was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in March 2020 and
authorized forgivable loans to small businesses. The Bank provided PPP loans to support current customers and foster relationships with
new customers. The loans earn interest at 1%, include fees between 1% and 5% and typically mature in two years. The Consolidated
48
Appropriations Act of 2021 allocated additional PPP funding. The second round of PPP loans have similar terms to the first round of
PPP loans mentioned above, but typically mature in five years.
The following table summarizes the impact of the PPP loans on our financials:
As of or for the Three Months Ended
March 31,
2022
2021
(Dollars in thousands)
PPP Loan Activity
Outstanding loan balance, beginning
$
64,805
$
292,230
Loan increases
-
110,962
Loan payoffs
(33,487)
(66,837)
Outstanding loan balance, end
$
31,318
$
336,355
PPP Loan Fee Activity
Unearned fee balance, beginning
$
1,683
$
4,189
Unearned fees added
-
4,105
Earned fees recognized
(876)
(2,415)
Unearned fee balance, end
$
808
$
5,879
Update to Customer and Industry Concentrations
As of March 31, 2022, the Company’s top 20 customer relationships, represented approximately 28% or $1. 3 billion of total
deposits. The Company believes that there are sufficient funding sources, including on-balance sheet liquid assets and wholesale deposit
options, so that an immediate reduction in these deposit balances would not be expected to have a material, detrimental effect on the
Company’s financial position or operations.
For the three-month period ended March 31, 2022, approximately 68% of credit card interchange income came from customers
that mobilized their workforce directly impacted by the COVID-19 pandemic. We currently anticipate the concentration to decline over
the remainder of 2022 as we grow the Company’s credit card business.
Performance Measures
As of or For the Quarter Ended
March 31,
December 31,
September 30,
June 30,
March 31,
2022
2021
2021
2021
2021
(Dollars in thousands, except per share data)
Return on average assets
(1)
1.23
%
1.50
%
1.54
%
1.10
%
0.84
%
Return on average equity
(1)
10.44
%
12.57
%
12.92
%
9.86
%
7.80
%
Earnings per share
$
0.33
$
0.41
$
0.41
$
0.30
$
0.23
Diluted earnings per share
$
0.33
$
0.40
$
0.41
$
0.30
$
0.23
Efficiency
(2)
57.57
%
55.38
%
59.06
%
53.61
%
50.41
%
Ratio of equity to assets
11.29
%
11.88
%
12.08
%
12.00
%
10.48
%
(1)
(2)
49
Results of Operations
Net Interest Income
Net interest income is presented on a tax-equivalent basis below. A tax-equivalent basis makes all income taxable at the same
rate. For example, $100 of tax-exempt income would be presented as $126.58, an amount that, if taxed at the statutory federal income
tax rate of 21% would yield $100. We believe a tax-equivalent basis provides for improved comparability between the various earning
assets.
For the Quarter Ended
March 31,
December 31,
September 30,
June 30,
March 31,
2022
2021
2021
2021
2021
Yield on securities - tax-equivalent
(1)
3.00
%
3.02
%
3.04
%
3.07
%
3.01
%
Yield on loans
4.00
4.17
4.00
3.99
3.94
Yield on earning assets - tax-equivalent
(1)
3.64
3.72
3.64
3.59
3.52
Cost of interest-bearing deposits
0.41
0.43
0.47
0.50
0.57
Cost of total deposits
0.31
0.33
0.38
0.41
0.48
Cost of FHLB and short-term borrowings
1.95
3.03
1.82
1.79
1.79
Cost of funds
0.39
0.48
0.46
0.49
0.56
Net interest margin - tax-equivalent
(1)
3.29
%
3.30
%
3.23
%
3.14
%
3.01
%
(1)
50
The following tables present, for the periods indicated, average balance sheet information, interest income, interest expense and the corresponding average yield and rates
paid:
Three Months Ended
March 31, 2022
March 31, 2021
Average Balance
Interest Income /
Expense
Average Yield /
Rate
(4)
Average Balance
Interest Income /
Expense
Average Yield /
Rate
(4)
(Dollars in thousands)
Interest-earning assets:
Securities - taxable
$
220,802
$
1,188
2.15
%
$
211,646
$
916
1.73
%
Securities - tax-exempt
(1)
533,674
4,467
3.35
449,925
4,055
3.61
Interest-bearing deposits in other banks
309,948
152
0.20
452,305
128
0.11
Gross loans, net of unearned income
(2)(3)
4,332,831
42,728
4.00
4,506,843
43,758
3.94
Total interest-earning assets
(1)
5,397,255
$
48,535
3.64
%
5,620,719
$
48,857
3.52
%
Allowance for credit losses
(57,922)
(78,371)
Other non-interest-earning assets
224,405
255,819
Total assets
$
5,563,738
$
5,798,167
Interest-bearing liabilities
Transaction deposits
$
585,990
$
222
0.15
%
$
716,763
$
364
0.21
%
Savings and money market deposits
2,302,552
1,847
0.33
2,421,765
2,388
0.40
Time deposits
587,452
1,442
1.00
972,006
2,976
1.24
Total interest-bearing deposits
3,475,994
3,511
0.41
4,110,534
5,728
0.57
FHLB and short-term borrowings
231,156
1,109
1.95
290,187
1,284
1.79
Trust preferred securities, net of fair value adjustments
1,012
25
10.25
965
24
9.96
Non-interest-bearing deposits
1,157,387
-
-
731,472
-
-
Cost of funds
4,865,549
$
4,645
0.39
%
5,133,158
$
7,036
0.56
%
Other liabilities
44,442
39,134
Stockholders’ equity
653,747
625,875
Total liabilities and stockholders’ equity
$
5,563,738
$
5,798,167
Net interest income - tax-equivalent
(1)
$
43,890
$
41,821
Net interest spread - tax-equivalent
(1)
3.25
%
2.96
%
Net interest margin - tax-equivalent
(1)
3.29
%
3.01
%
(1)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%.
(2)
Loans, net of unearned income include non-accrual loans of $33 million and $63 million as of March 31, 2022 and 2021, respectively.
(3)
Loan interest income includes loan fees of $4 million and $4 million for the three months ended March 31, 2022 and 2021, respectively.
(4)
Actual unrounded values are used to calculate the reported yield or rate. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.
51
Changes in interest income and interest expense result from changes in average balances (volume) of interest earning assets and
interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and
volumes on our net interest income during the periods shown. Information is provided with respect to: (i) changes in volume (change in
volume times old rate); (ii) changes in rates (change in rate times old volume); and (iii) changes in rate/volume (change in rate times the
change in volume).
Three Months Ended
March 31, 2022 over 2021
Average Volume
Yield/Rate
Net Change
(2)
(Dollars in thousands)
Interest Income
Securities - taxable
$
41
$
231
$
272
Securities - tax-exempt
(1)
716
(304)
412
Interest-bearing deposits in other banks
(49)
73
24
Gross loans, net of unearned income
(1,708)
678
(1,030)
Total interest income
(1)
$
(1,000)
$
678
$
(322)
Interest Expense
Transaction deposits
$
(59)
$
(83)
$
(142)
Savings and money market deposits
(113)
(428)
(541)
Time deposits
(1,022)
(512)
(1,534)
Total interest-bearing deposits
(1,194)
(1,023)
(2,217)
FHLB and short-term borrowings
(277)
102
(175)
Trust preferred securities, net of fair value adjustments
1
-
1
Total interest expense
(1,470)
(921)
(2,391)
Net interest income
(1)
$
470
$
1,599
$
2,069
(1)
rate used is 21.0%.
(2)
volume or rate.
Interest income -
driven by lower average loans outstanding and a $1.5 million reduction of PPP fee income. Average earning assets decreased $223
million or 4% from the same quarter in 2021, which included a $269 million or 86% decrease in average PPP loans.
Interest expense
$385 million in higher-rate time deposits matured that decreased the cost of time deposits by 24 basis points. Average interest-bearing
deposits decreased $635 million or 15% to $3.5 billion in the first quarter of 2022 from the same prior year period, partially offset by a
$426 million or 58% increase in non-interest-bearing deposits. The change in deposit mix improved the overall cost of funds.
Net interest income
2021 driven by rate and volume declines in interest-bearing liabilities. The Company currently anticipates net interest margin to increase
for the remainder of 2022 because of the Company’s variable-rate assets and the rising rate environment, although deposit migration and
remaining pressure on loan pricing will be headwinds.
Impact of Transition Away from LIBOR
The Company had $1.0 billion in loans tied to LIBOR at March 31, 2022. Starting in October 2021, the Company began limiting
loans originated using the LIBOR index. For current borrowers, the Company is modifying loan document language to account for the
transition away from LIBOR as loans renew or originate. The Company plans to replace LIBOR-based loans with the Secured
Overnight Financing Rate (“SOFR”). At March 31, 2022, the Company had $322 million in loans tied to SOFR. The Company adopted
Accounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate
Reform on Financial Reporting” in 2020. The ASU allows the Company to recognize the modification related to LIBOR as a
52
continuation of the old contract, rather than a cancellation of the old contract resulting in a write-off of unamortized fees and creation of
a new contract.
Non-Interest Income (Expense)
For the Quarter Ended
March 31,
December 31,
September 30,
June 30,
March 31,
2022
2021
2021
2021
2021
(Dollars in thousands)
Total non-interest income (expense)
$
4,942
$
4,796
$
(1,105)
$
5,825
$
4,144
Non-interest income (expense) to average
assets
(1)
0.36
%
0.34
%
(0.08)
%
0.41
%
0.29
%
(1)
Interim periods annualized.
The components of non-interest income were as follows for the periods shown:
Three Months Ended
March 31,
Change
2022
2021
$
%
(Dollars in thousands)
Service charges and fees on customer accounts
$
1,408
$
957
$
451
47
%
Realized gains (losses) on available-for-sale securities
(26)
10
(36)
(360)
Unrealized gains (losses), net on equity securities
(103)
(39)
(64)
164
Income from bank-owned life insurance
388
416
(28)
(7)
Swap fees and credit valuation adjustments, net
118
155
(37)
(24)
ATM and credit card interchange income
2,664
2,328
336
14
Other non-interest income
493
317
176
56
Total non-interest income
$
4,942
$
4,144
$
798
19
%
The changes in non-interest income were driven primarily by the following:
Service charges and fees on customer accounts
The increase for the quarter ended March 31, 2022 compared to the corresponding period in 2021 was driven by a $431 thousand
increase in account analysis fees due to customer growth and an increase in outstanding balances.
ATM and credit card interchange income
2022 compared to the same period in 2021 was primarily the result of customer growth.
For the three-month period ended March 31, 2022, approximately 68% of credit card interchange income came from customers that
mobilized their workforce directly impacted by the COVID-19 pandemic. The Company anticipates a portion of credit card activity and
related income will continue to fluctuate in connection with changes in COVID-19 cases and demand for a temporary, mobilized
workforce.
Other non-interest income
period in 2021 was primarily related to $126 thousand in state employment incentives received during 2022. We expect to continue to
receive the incentives quarterly going forward for three years, but at significantly lower amounts. The Company also saw a $53
thousand increase in foreign exchange fees for the quarter ended March 31, 2022 compared to the same period in 2021.
53
Non-Interest Expense
For the Quarter Ended
March 31,
December 31,
September 30,
June 30,
March 31,
2022
2021
2021
2021
2021
(Dollars in thousands)
Total non-interest expense
$
27,666
$
26,715
$
24,036
$
25,813
$
22,818
Non-interest expense to average assets
(1)
2.02
%
1.93
%
1.76
%
1.82
%
1.60
%
(1)
The components of non-interest expense were as follows for the periods indicated:
Quarter Ended
March 31,
Change
2022
2021
$
%
(Dollars in thousands)
Salary and employee benefits
$
17,941
$
13,553
$
4,388
32
%
Occupancy
2,493
2,494
(1)
-
Professional fees
805
782
23
3
Deposit insurance premiums
737
1,151
(414)
(36)
Data processing
812
716
96
13
Advertising
692
303
389
128
Software and communication
1,270
1,065
205
19
Foreclosed assets, net
(53)
50
(103)
(206)
Other non-interest expense
2,969
2,704
265
10
Total non-interest expense
$
27,666
$
22,818
$
4,848
21
%
The changes in non-interest expense were driven primarily by the following:
Salary and Employee Benefits
same period in 2021 primarily due to the impact of continued hiring for production talent in a very competitive environment, annual
merit increases, increased stock-based compensation costs due to improved, expected payouts on performance-based awards, and higher
taxes and benefits due to incentive payouts.
Deposit Insurance Premiums
decreased for the quarter ended March 31, 2022 compared to the same period in 2021 as a result of asset balance changes, changes in
asset quality and changes in capital ratios. We currently anticipate deposit insurance premiums will increase over the next quarter
because of expected loan growth and the common stock repurchase program.
Advertising
compared to the same quarter in 2021 because of COVID-19 pandemic restrictions being lifted.
Software and Communication
beginning-to-end loan originations, provide customers with a suite of online tools and analyze operational trends. In addition to the
growing number of technologies implemented, a portion of the increase in costs was due to our growth. We currently anticipate our
software and communication costs to continue to increase in 2022 as we continue adding and implementing new software products that
improve our customer’s experience.
Other Non-interest Expense
- Other non-interest expense increased for the quarter ended March 31, 2022 compared to the same period
in 2021 primarily due to an increase in commercial card costs as a result of our growing customer base and increased use as a result of
the COVID-19 pandemic. In addition, insured cash sweep deposits increased in 2022 from 2021, which drove related fees higher and the
Company’s travel costs increased as COVID-19 restrictions have eased. The increase was partially offset by a recovery from a
previously expensed fraud claim.
54
Income Taxes
For the Quarter Ended
March 31,
December 31,
September 30,
June 30,
March 31,
2022
2021
2021
2021
2021
(Dollars in thousands)
Income tax expense
$
4,188
$
5,725
$
5,660
$
3,263
$
2,908
Income before income taxes
21,016
26,526
26,660
18,840
14,943
Effective tax rate
20
%
22
%
21
%
17
%
19
%
Our income tax expense differs from the amount that would be calculated using the federal statutory tax rate, primarily from
investments in tax advantaged assets, including bank-owned life insurance and tax-exempt municipal securities; state tax credits; and
permanent tax differences from equity-based compensation. Refer to “Note 10: Income Tax” within the Notes to Condensed
Consolidated Financial Statements (unaudited) for a reconciliation of the statutory rate to the Company’s actual income tax expense.
During the three-month period ended March 31, 2022, the Company’s effective tax rate benefited from permanent tax differences
related to stock-compensation awards that vested during the first quarter of 2022 and tax-exempt interest. During the three-month period
ended June 30, 2021, the Company benefited from $2 million in bank-owned life insurance settlement benefits that reduced income
taxes by $387 thousand and reduced the effective tax rate by approximately 2%.
We currently anticipate the Company’s effective tax rate to remain within the 20% to 23% range in the near term.
Analysis of Financial Condition
Securities Portfolio
The securities portfolio is maintained to serve as a contingent, on-balance sheet source of liquidity. The objective of the
investment portfolio is to optimize earnings, manage credit and interest rate risk, ensure adequate liquidity, and meet pledging and
regulatory capital requirements. As of March 31, 2022, available-for-sale investments totaled $723 million, a decrease of $23 million
from December 31, 2021.
The decline in the securities portfolio was driven by a $59 million decline in the unrealized gain (loss) on AFS securities. The
decline was partially offset by the purchase of $22 million in tax-exempt municipal securities and $26 million in mortgage-backed
securities. The Company currently anticipates continuing to grow the securities portfolio in proportion to the growth of the balance
sheet. For additional information, see “Note 3: Securities” in the Notes to Condensed Consolidated Financial Statements (unaudited).
55
Loan Portfolio
Refer to “Note 4: Loans and Allowance for Credit Losses (“ACL”)” within the Notes to Condensed Consolidated Financial Statements (unaudited) for additional
information regarding the Company’s loan portfolio. As of March 31, 2022, gross loans increased $93 million or 2% from December 31, 2021 and was driven by the following:
Commercial
Commercial lines of credit
Energy
Commercial Real Estate
The following table shows the contractual maturities of our gross loans and sensitivity to interest rate changes:
As of March 31, 2022
Due in One Year or Less
Due in One Year through
Five Years
Due in Five Year through
Fifteen Years
Due after Fifteen Years
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Total
(Dollars in thousands)
Commercial
$
17,593
$
32,254
$
287,935
$
305,912
$
42,807
$
98,726
$
20,000
$
-
$
805,227
Commercial lines of credit
28,508
292,359
14,886
316,691
11,636
17,012
-
-
681,092
Energy
39
69,129
10,614
192,037
-
-
-
-
271,819
Commercial real estate
55,607
157,631
336,844
471,575
144,706
198,154
-
14,013
1,378,530
Construction and land
development
14,676
73,954
35,785
373,212
9,244
25,531
2,587
32,488
567,477
Residential real estate
2,585
990
15,081
1,331
86,011
2,642
272
256,932
365,844
Multifamily real estate
8,459
65,485
54,163
101,382
6,142
7,877
-
-
243,508
Consumer
5,203
16,213
2,540
3,694
-
19,316
-
2,359
49,325
Total
$
132,670
$
708,015
$
757,848
$
1,765,834
$
300,546
$
369,258
$
22,859
$
305,792
$
4,362,822
Provision and Allowance for Credit Losses (“ACL”)
On January 1, 2022, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses. Refer to “Note 1: Nature of Operations and Summary of Significant
Accounting Policies” and “Note 4: Loans and Allowance for Credit Losses (“ACL”)” within the Notes to Condensed Consolidated Financial Statements (unaudited) for information
regarding the Company’s ACL implementation and the ACL process.
The ACL at March 31, 2022 represents our best estimate of the expected credit losses in the Company’s loan portfolio and off-balance sheet commitments, measured over the
contractual life of the underlying instrument.
56
March 31, 2022
December 31, 2021
September 30, 2021
June 30, 2021
March 31, 2021
(Dollars in thousands)
Provision for credit losses
(1)
$
(316)
$
(5,000)
$
(10,000)
$
3,500
$
7,500
Provision for credit losses
(1)
(309)
N/A
N/A
N/A
N/A
Allowance for credit losses
(2)
55,231
58,375
64,152
75,493
74,551
Allowance for credit losses
(2)
4,875
N/A
N/A
N/A
N/A
Net charge-offs
$
1,081
$
777
$
1,341
$
2,558
$
8,244
(1)
Prior to March 31, 2022, this line represents the provision for loan losses
(2)
Prior to March 31, 2022, this line represents the allowance for loan losses
January 1, 2022, the adoption date, is presented below instead of December 31, 2021 for comparability purposes. The allocation in one portfolio segment does not preclude its
availability to absorb losses in other segments. The table below presents the allocation of the allowance for credit losses as of the dates indicated:
March 31, 2022
January 1, 2022
ACL Amount
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
ACL Amount
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
Loans
Off-
Balance
Sheet
Total
Loans
Off-
Balance
Sheet
Total
(Dollars in thousands)
Commercial
$
9,981
$
66
$
10,047
17
%
18
%
$
10,139
$
107
$
10,246
17
%
20
%
Commercial lines of credit
9,361
153
9,514
16
16
8,866
44
8,910
14
14
Energy
7,507
258
7,765
13
6
9,190
265
9,455
15
7
Commercial real estate
18,628
753
19,381
32
32
18,933
711
19,644
32
30
Construction and land
development
3,678
3,514
7,192
12
13
3,666
3,914
7,580
12
14
Residential real estate
3,089
4
3,093
5
8
3,046
5
3,051
5
8
Multifamily real estate
2,342
116
2,458
4
6
2,465
137
2,602
4
6
Consumer
645
11
656
1
1
323
1
324
1
1
Total
$
55,231
$
4,875
$
60,106
100
%
100
%
$
56,628
$
5,184
$
61,812
100
%
100
%
Refer to “Note 4: Loans and Allowance for Credit Losses (“ACL”)” within the Notes to the Condensed Consolidated Financial Statements (unaudited) for a discussion of the
changes in the ACL. Provided below is additional information regarding charge-offs and recoveries:
57
Charge-offs and Recoveries:
For the three months ended March 31, 2022, net charge-offs were $1 million. Charge-offs included $1 million related to a commercial line of credit that originated in 2018 and
started to deteriorate at the end of 2021, a $1 million charge-off related to an energy loan originated in 2016 that was significantly impacted by lower oil prices over the past few
years, and a $750 thousand charge-off on a commercial real estate project that originated in 2017 and started to deteriorate in 2020. Charge-offs were partially offset primarily by a
$1.8 million recovery on an energy loan that was charged-off in 2020. The trailing twelve-month net charge-off rate was 0.13%. The Company currently expects the current trailing
twelve-month net charge-off rate to better represent the anticipated activity for 2022.
During the three-months ended March 31, 2021, charge-offs primarily related to two commercial borrowers that were unable to support their debt obligations. The $8 million
charged-off was greater than the reserved balance in the allowance for loan losses at December 31, 2020 resulting in a $5 million increase in the provision during the quarter ended
March 31, 2021.
The below table provides the ratio of net charge-offs (recoveries) to average loans outstanding based on our loan categories for the periods indicated:
For the Quarter Ended
March 31, 2022
December 31, 2021
September 30, 2021
June 30, 2021
March 31, 2021
Commercial
(0.27)
%
0.27
%
0.04
%
-
%
0.02
%
Commercial lines of credit
0.76
0.04
0.62
2.20
5.93
Energy
(1.02)
0.68
0.64
-
-
Commercial real estate
0.34
-
-
-
-
Construction and land development
-
-
-
-
-
Residential real estate
-
(0.32)
-
-
-
Multifamily real estate
-
(0.06)
(0.01)
-
-
Consumer
0.05
(0.01)
(0.03)
(0.04)
0.29
Total
0.10
%
0.07
%
0.13
%
0.23
%
0.74
%
Nonperforming Assets and Other Asset Quality Metrics
Nonperforming assets include: (i) nonperforming loans - includes non -accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under
troubled debt restructurings (“TDRs”) that are not performing in accordance with their modified terms; (ii) foreclosed assets held for sale; (iii) repossessed assets; and (iv) impaired
debt securities.
Nonperforming assets increased slightly to $36 million or 0.64% of total assets as of March 31, 2022 primarily due to an $11 million, previously identified substandard
commercial line of credit. The increase was partially offset by a $7 million decline in nonaccrual energy loans due to $1 million in charge-offs, $3 million in payoffs and $3 million
in loans placed back on accrual status. As of period end, 25% of nonperforming assets remain in the energy sector, which continues to be positively impacted by the sustained higher
commodity prices.
During 2021, nonperforming assets continued to decrease due primarily to upgrades and pay offs in the commercial and energy portfolios. As of December 31, 2021, 49% of
nonperforming assets related to energy credits that were significantly impacted by lower oil prices over the past few years.
58
Credit quality metrics generally improved during the first quarter of 2022 as the ACL decreased compared to the prior quarter, reflecting some stabilization in the Company’s
economic outlook.
The table below summarizes our nonperforming assets and related ratios as of the dates indicated:
For the Quarter Ended
March 31,
December 31,
September 30,
June 30,
March 31,
2022
2021
2021
2021
2021
(Dollars in thousands)
Nonaccrual loans
$
33,071
$
31,432
$
48,147
$
54,652
$
63,319
Loans past due 90 days or more and still accruing
1,534
90
342
1,776
3,183
Total nonperforming loans
34,605
31,522
48,489
56,428
66,502
Foreclosed assets held for sale
973
1,148
1,148
1,718
2,347
Total nonperforming assets
$
35,578
$
32,670
$
49,637
$
58,146
$
68,849
ACL to total loans
1.27
%
1.37
%
1.51
%
1.78
%
1.65
%
ACL + RUC to total loans
(1)
1.38
ACL to nonaccrual loans
167
186
133
138
118
ACL to nonperforming loans
160
185
132
134
112
Nonaccrual loans to total loans
0.76
0.74
1.13
1.29
1.40
Nonperforming loans to total loans
0.79
0.74
1.15
1.33
1.48
Nonperforming assets to total assets
0.64
%
0.58
%
0.92
%
1.09
%
1.15
%
(1)
Includes the ACL on off-balance sheet credit exposure that resulted from CECL adoption on January 1, 2022.
59
Other asset quality metrics management reviews include gross loans past due 30 - 89 days and classified, gross loans. The Company defines classified, gross loans as gross
loans (deferred loan fees and costs are excluded) categorized as substandard - performing, substandard - nonperforming, doubtful, or loss. The definitions of substandard, doubtful
and loss are provided in “Note 4: Loans and Allowance for Credit Losses (“ACL”)” in the Notes to Condensed Consolidated Financial Statements (unaudited). The following table
summarizes our gross loans past due 30 - 89 days, classified assets, and related ratios as of the dates indicated:
March 31,
December 31,
September 30,
June 30,
March 31,
2022
2021
2021
2021
2021
(Dollars in thousands)
Gross Loans Past Due Detail
30 - 59 days past due
$
14,815
$
1,671
$
3,072
$
18,758
$
10,583
60 - 89 days past due
1,135
1,858
34,528
10
403
Total gross loans 30 - 89 days past due
$
15,950
$
3,529
$
37,600
$
18,768
$
10,986
Loans 30 - 89 days past due / gross loans
0.37
%
0.08
%
0.89
%
0.44
%
0.24
%
Classified, Gross Loans
Substandard - performing
$
40,257
$
47,275
$
75,999
$
116,078
$
205,560
Substandard - nonperforming
30,619
28,879
45,063
49,300
57,967
Doubtful
2,451
2,554
3,084
5,352
5,352
Loss
-
-
-
-
-
Total classified, gross loans
73,327
78,708
124,146
170,730
268,879
Foreclosed assets held for sale
973
1,148
1,148
1,718
2,347
Total classified assets
$
74,300
$
79,856
$
125,294
$
172,448
$
271,226
Classified loans / (total capital + ACL)
10.8
%
10.8
%
17.3
%
24.0
%
38.2
%
Classified loans / (total capital + ACL + RUC)
(1)
10.7
Classified assets / (total capital + ACL)
11.0
%
11.0
%
17.5
%
24.2
%
38.6
%
(1)
Includes the ACL on off-balance sheet credit exposure that resulted from CECL adoption on January 1, 2022.
The increase in gross loans past due between 30 and 89 days as of March 31, 2022 was primarily driven by an $11 million commercial line of credit. In the first quarter of
2022, we experienced improvement in our classified loan totals as classified loans decreased 7% during the quarter to $73 million. Classified totals in the energy portfolio decreased
24% to $16 million compared to the prior quarter and now represent 22% of total classified loans. The improvements in credit metrics compared to March 31, 2021 were primarily
driven by upgrades in COVID-19 impacted segments and the energy portfolio.
The Company continually analyzes economic and other factors including the impact of the COVID-19 pandemic and changes in oil and gas prices among other
considerations.
60
Deposits and Other Borrowings
The following table sets forth the maturity of time deposits as of March 31, 2022:
As of March 31, 2022
Three Months or Less
Three to Six Months
Six to Twelve Months
After Twelve Months
Total
(Dollars in thousands)
Time deposits in excess of FDIC insurance limit
$
22,772
$
89,837
$
61,600
$
12,320
$
186,529
Time deposits below FDIC insurance limit
72,515
94,392
104,135
54,496
325,538
Total
$
95,287
$
184,229
$
165,735
$
66,816
$
512,067
At March 31, 2022, our deposits totaled $5 billion, a decrease of $62 million or 1% from December 31, 2021. The decrease, included a decline of $112 million in time deposits
and $53 million of non-interest bearing deposits, partially offset by an increase in $103 million in money market, NOW and savings deposits. The increase in money market, Now, and
savings deposits. was driven by required payments from our customers to the Internal Revenue Service and interest rate competition. The decrease in time deposits resulted from
maturities, primarily from 6-month CD’s and the current interest rate environment.
Other borrowings include FHLB advances and our trust preferred security. At March 31, 2022, other borrowings totaled $228 million, a $10 million or 4% decrease from
December 31, 2021. The decline was driven by borrowings that matured and were not replaced due to increased Company liquidity.
As of March 31, 2022, the Company had approximately $330 million of deposits with one customer relationship. The Company evaluated the deposit concentration and
determined that a significant reduction to these deposits would not adversely impact the Company as sufficient liquidity is accessible and at favorable rates.
As of March 31, 2022, the Company had approximately $2.3 billion of uninsured deposits, which is an estimated amount based on the same methodologies and assumptions
used for the Bank’s regulatory requirements. The Company believes that its current capital ratios and liquidity are sufficient to mitigate the risks of uninsured deposits.
61
Liquidity and Capital Resources
Contractual Obligations and Off-Balance Sheet Arrangements
The Company is subject to contractual obligations made in the ordinary course of business. The obligations include deposit
liabilities, other borrowed funds, and operating leases. Refer to “Note 6: Time Deposits and Other Borrowings” within the Notes to
Condensed Consolidated Financial Statements (unaudited) for a listing of the Company’s significant contractual cash obligations. Refer
to “Note 14: Leases” within the Notes to Condensed Consolidated Financial Statements (unaudited) for the Company’s contractual
obligations to third parties on lease obligations.
As a financial services provider, the Company is a party to various financial instruments with off-balance sheet risks, such as
commitments to extend credit. Off-balance sheet arrangements represent the Company’s future cash requirements. However, a portion
of these commitments may expire without being drawn upon. Refer to “Note 12: Commitments and Credit Risk” within the Notes to
Condensed Consolidated Financial Statements (unaudited) for a listing of the Company’s off -balance sheet arrangements.
The Company’s short-term and long-term contractual obligations, including off-balance sheet obligations, may be satisfied
through the Company’s on-balance sheet and off-balance sheet liquidity discussed below.
Liquidity
The Company’s liquidity strategy is to maintain adequate, but not excessive, liquidity to meet the daily cash flow needs of its
clients while attempting to achieve adequate earnings for its stockholders. The liquidity position is monitored continuously by the
Company’s finance department. The Company's short-term and long-term liquidity requirements are primarily met through cash flow
from operations, redeployment of prepaying and maturing balances in our loan portfolio and security portfolio, increases in client
deposits and wholesale deposits. Liquidity resources can be derived from two sources: (i) on-balance sheet liquidity resources, which
represent funds currently on the balance sheet and (ii) off-balance sheet liquidity resources, which represent funds available from third-
party sources. The Company’s on-balance sheet and off-balance sheet liquidity resources consisted of the following as of the dates
indicated:
March 31, 2022
December 31, 2021
(Dollars in thousands)
Total on-balance sheet liquidity
$
1,000,925
$
1,224,253
Total off-balance sheet liquidity
779,725
732,748
Total liquidity
$
1,780,650
$
1,957,001
On-balance sheet liquidity as a percent of assets
18
%
22
%
Total liquidity as a percent of assets
32
%
35
%
For the three-months ended March 31, 2022, the Company’s cash and cash equivalents declined $206 million from December 31,
2021 to $277 million, representing 5% of total assets. During the first quarter of 2022, the Company increased the available-for-sale
security portfolio on an amortized cost basis by $36 million, net of paydowns and maturities, to improve the yield on interest-earning
assets. In addition, the Company’s loan growth of $93 million during the three-months ended March 31, 2022 reduced cash and cash
equivalents. The Company’s time deposits declined by $112 million due to maturities and the current interest rate environment, which
was partially offset by a $50 million increase in other deposit products. The Company continued its repurchase program, purchasing $17
million of common stock during the first quarter of 2022.
The Company believes that its current liquidity will be sufficient to meet anticipated cash requirements for the next 12 months
and thereafter. In the near-term, the Company currently anticipates a continued decline in time deposits as approximately $95 million
will mature within the next three months of 2022. In addition, the Company anticipates $5 million of FHLB borrowings to mature by
June 30, 2022 with an additional $65 million that is callable by June 2022. The Company has several on and off-balance sheet options to
ensure any resulting reductions in cash and cash equivalents are appropriately offset to ensure appropriate liquidity.
62
Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.
The regulatory capital requirements involve quantitative measures of the Company’s assets, liabilities, select off-balance sheet items and
equity. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Refer to “Note 8:
Regulatory Matters” in the Notes to Condensed Consolidated Financial Statements (unaudited) for additional information. Management
believes that as of March 31, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial
services industry. Application of these principles requires management to make complex and subjective estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. The Company bases estimates on historical experience
and on various other assumptions that it believes to be reasonable under current circumstances. These assumptions form the basis for
management judgments about the carrying values of assets and liabilities that are not readily available from independent, objective
sources. The Company evaluates estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly
different estimates. Actual results may differ from these estimates.
A discussion of these policies can be found in the section captioned “Critical Accounting Policies and Estimates” in
Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2021 Form 10-K.
On January 1, 2022, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. Refer to “Note 1: Nature of Operations and Summary of Significant Accounting Policies” and
“Note 4: Loans and Allowance for Credit Losses (“ACL”)” within the Notes to Condensed Consolidated Financial Statements
(unaudited) for information regarding the Company’s ACL implementation and the ACL process. Determining the appropriateness of the
ACL is complex and requires judgment by management about the effect of matters that are inherently uncertain. These critical estimates
include significant use of the Company’s historical data and complex methods to interpret them.
It is difficult to estimate how potential changes in any one input might affect the overall ACL because inputs may change at
different rates and may not be consistent across the loan segments. In addition, changes in inputs may be directionally inconsistent such
that one factor may offset deterioration in others. The Company identified the following estimates and assumptions as the main drivers
in the required ACL for loans and the reserve for off-balance sheet commitments:
◾
Fully exhausted loan pool
“cohort”) and tracking the cohort’s charge-offs, net of recoveries, over a 10-year period (known as the estimated
economic life). A charge-off rate for each cohort is calculated based on charge-offs, net of recoveries over the initial loan
balance. The charge-off rate for a specific cohort is not included in the weighted average historical loss rate until “fully
exhausted.”
A cohort balance declines due to modifications, renewals, and paydowns. The Company requires the remaining cohort
balance to be less than 15% of its original cohort balance before being included in the historical loss factor. The 15%
represents the exhaustion rate. Changes to the assumed exhaustion rate could increase or decrease the historical loss rates
based on the timing of charge-offs, net of recoveries. For example, an exhaustion rate of 50% on the commercial
segment would have reduced the required ACL by approximately $264 thousand for the three-month period ended
March 31, 2022.
◾
Forward looking factors
expected losses based on an economic outlook. The Company’s current methodology increases the ACL one basis point
63
for each 1% increase in the average unemployment rate forecast. As of March 31, 2022, a 1% increase in the average
unemployment rate would increase the ACL by approximately $436 thousand.
◾
Changes in the assumed utilization rate of off-balance sheet commitments
historical utilization rate for all loan segments, excluding construction and development loans that use a higher
utilization rate. An ACL on off-balance sheet commitments is required if the end of period utilization rate is less than the
12-month historical utilization rate. For example, a 1% decrease in the utilization rate of commercial lines of credit at
March 31, 2022 would increase the required ACL by $221 thousand.
Besides the ACL methodology mentioned above, there have been no additional changes in the Company’s application of critical
accounting policies and estimates since December 31, 2021.
Recent Accounting Pronouncements
Refer to “Note 1: Nature of Operations and Summary of Significant Accounting Policies” included in the Notes to Condensed
Consolidated Financial Statements (unaudited) included elsewhere in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
A primary component of market risk is interest rate volatility. Interest rate risk management is a key element of the Company’s
balance sheet management. Interest rate risk is the risk that net interest margins will erode over time due to changing market conditions.
Many factors can cause margins to erode: (i) lower loan demand; (ii) increased competition for funds; (iii) weak pricing policies; (iv)
balance sheet mismatches; and (v) changing liquidity demands. The objective is to maximize income while minimizing interest rate risk.
The Company manages its sensitivity position using its interest rate risk policy. The management of interest rate risk is a three-step
process and involves: (i) measuring the interest rate risk position; (ii) policy constraints; and (iii) strategic review and implementation.
Our exposure to interest rate risk is managed by the Funds Management Committee (“FMC”). The FMC uses a combination of
three systems to measure the balance sheet’s interest rate risk position. The three systems in combination are expected to provide a better
overall result than a single system alone. The three systems include: (i) gap reports; (ii) earnings simulation; and (iii) economic value of
equity. The FMC’s primary tools to change the interest rate risk position are: (i) investment portfolio duration; (ii) deposit and borrowing
mix; and (iii) on balance sheet derivatives.
The FMC evaluates interest rate risk using a rate shock method and rate ramp method. In a rate shock analysis, rates change
immediately, and the change is sustained over the time horizon. In a rate ramp analysis, rate changes occur gradually over time. The
following tables summarize the simulated changes in net interest income and fair value of equity over a 12-month horizon using a rate
shock and rate ramp method as of the dates indicated:
Hypothetical Change in Interest Rate - Rate Shock
March 31, 2022
March 31, 2021
Change in Interest
Rate (Basis Points)
Percent change in net
interest income
Percent change in fair
value of equity
Percent change in net
interest income
Percent change in fair
value of equity
+300
6.5
%
(8.1)
%
0.7
%
(12.2)
%
+200
3.9
(4.6)
(0.1)
(7.5)
+100
1.6
(2.0)
(0.6)
(3.6)
Base
-
%
-
%
-
%
-
%
-100
NA
(1)
NA
(1)
NA
(1)
NA
(1)
-200
NA
(1)
NA
(1)
NA
(1)
NA
(1)
(1)
The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment.
64
Hypothetical Change in Interest Rate - Rate Ramp
March 31, 2022
March 31, 2021
Change in Interest Rate
Percent change in net interest
income
Percent change in net interest
income
+300
2.8
%
0.3
%
+200
1.6
(0.2)
+100
0.6
(0.4)
Base
-
%
-
%
-100
NA
(1)
NA
(1)
-200
NA
(1)
NA
(1)
(1)
The Company’s position is slightly asset sensitive as of March 31, 2022. The hypothetical positive change in net interest income
as of March 31, 2022 in an up 100 basis point shock is mainly due to approximately two-thirds of the Company’s earning assets
repricing or maturing within the first year, with much of that being in the first 90 days. In addition, the Company’s time deposits and
other borrowings will continue to mature. Increases in the up 100 environment are impacted by floors on variable rate loans. In an up
200 and 300 environment, floors on variable rate loans become less impactful and earning assets reprice faster than interest-bearing
liabilities. Future rate increases will drive higher loan yields as the impact of floors diminishes. The Company currently anticipates that
overall cost of funds will lag interest rate increases and will result in an increase to net interest income. The Company currently
anticipates the use of cash flow hedges in the near term to manage rate sensitivity.
The models the Company uses include assumptions regarding interest rates while balances remain unchanged. These assumptions
are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency
of interest rate changes as well as changes in market conditions, customer behavior and management strategies, among other factors.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (“Exchange Act”)) as of March 31, 2022. Based on that evaluation, the Company’s Chief Executive Officer and
Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2022.
Changes in Internal Control over Financial Reporting
The Company implemented internal controls to ensure the Company adequately calculated changes due to, and properly assessed
the impact of, the accounting standard updates related to the adoption of ASC 326 on January 1, 2022. There were no significant
changes to our internal control over financial reporting due to the adoption of the new standard.
No change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the first quarter of 2022 has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management,
following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a
65
material adverse effect on our business, financial condition, results of operations, cash flows or growth prospects. However, given the
nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations
governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism
laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A.
Risk Factors" in our 2021 Form 10-K, which could materially affect our business, financial condition or results of operations in future
periods. There were no material changes from the risk factors disclosed in the 2021 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
Recent Sales of Unregistered Securities
During the quarter-ended March 31, 2022, 33,500 warrants were exercised at a strike price of $5.00 per warrant. A total of 33,500
common shares were issued. 80,000 warrants remain outstanding at a strike price of $5.00 per warrant.
(b)
None.
(c)
Share Repurchase Program
The following table summarizes our repurchases of our common shares for the three-months ended March 31, 2022:
Calendar Month
Total Number of
Shares
Repurchased
Average Price
Paid per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
Approximate Dollar Value of Shares that
may yet be Purchased as Part of
Publicly Announced Plans or Programs
January 1 - 31
185,466
$
15.71
185,466
$
18,735,409
February 1 - 28
284,972
15.92
284,972
14,193,758
March 1 - 31
587,894
15.80
587,894
$
4,890,785
Total
1,058,332
$
15.82
1,058,332
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.
66
ITEM 6. EXHIBITS
Exhibit
Number
Exhibit Description
101.INS*
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags
are embedded within the Inline XBRL document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (formation in Inline XBRL and contained in Exhibit 101)
* Filed Herewith
** Furnished Herewith
† Indicates a compensatory Plan
67
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CrossFirst Bankshares, Inc.
May 5, 2022
/s/ Benjamin R. Clouse
Benjamin R. Clouse
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael J. Maddox, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CrossFirst Bankshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: May 5, 2022
/s/ Michael J. Maddox
Michael J. Maddox
Chief Executive Officer
(Principal Executive Officer)
Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Benjamin R. Clouse, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CrossFirst Bankshares, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: May 5, 2022
/s/ Benjamin R. Clouse
Benjamin R. Clouse
Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
UNDER 18 U.S.C. § 1350 FURNISHED PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(b)
In connection with the Quarterly Report of CrossFirst Bankshares, Inc. (the “Company”) on Form 10-Q for the period ended on March 31,
2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in his respective
capacities indicated below, hereby certifies, pursuant to 18 U.S.C. § 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002,
that, to his knowledge and belief, (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: May 5, 2022
/s/ Michael J. Maddox
Michael J. Maddox
President and Chief Executive Officer (Principal Executive Officer)
/s/ Benjamin R. Clouse
Benjamin R. Clouse
Chief Financial Officer (Principal Financial Officer)
Table of Contents
1
FIRST AMENDMENT TO EMPLOYMENT
AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT ("Amendment") is
made and entered into on May 11, 2021, amends certain terms, effective as of the date provided
below, of that employment agreement entered into, by and between CrossFirst Bank, a state bank
organized under the laws of the State of Kansas (the "Company"), CrossFirst Bankshares, Inc., a
Kansas Corporation (the "Holding Company"), and W. Randall Rapp ("Employee") on April 1,
2019 (the "Employment Agreement").
WHEREAS, the Company, the Holding Company, and Employee entered into the
Employment Agreement for the purpose of memorializing the terms of Employee's employment
with the Company;
WHEREAS, section 5.9(b) of the Employment Agreement permits the Employment
Agreement to be modified or amended by a written instrument, executed by the party against whom
enforcement of such amendment may be sought;
WHEREAS, Employees title has changed and the Company and Employee desire
to
amend
·the Employment Agreement to reflect such changes;
WHEREAS, section 3 of the Employment Agreement provides Employee with certain
rights in the event of a termination of employment, including the right to receive certain financial
benefits in the event of Employee's involuntary termination of employment;
WHEREAS, effective as June 2, 2020, the Holding Company adopted the CrossFirst
Bankshares, Inc. Senior Executive Severance Plan (the "Severance Plan") which is intended to
provide financial protection in the event of unexpected job loss to senior executives of the Holding
Company or the Company;
WHEREAS, the Company, the Holding Company, and Employee desire to amend the
Employment Agreement such that Employee will no longer be entitled to the benefits described in
section 3 of the Employment Agreement, but instead will participate in the Severance Plan, and
effective from the date provided below, section 3 of the Employment Agreement, other than
sections 3.l(c), 3.l(h), and 3.7, will be null and void and of no application; and
WHEREAS, section l.l(a) and section 3 of the Employment Agreement
will
be amended
as provided herein.
NOW, THEREFORE, effective as provided below, the following amendments are hereby
made to the Employment Agreement:
1.
As of the date hereof, section 1.1 of the Employment Agreement is hereby deleted and
replaced with the following:
1.1
POSITION AND TITLE. The Company hereby hires Employee to serve as the Chief
Risk and Credit Officer.
(a)
LIMITS ON AUTHORITY. Employee shall, to the best of his abilities, perform
his duties in such capacity pursuant to this Agreement in compliance with applicable
law, consistent with such direction as the Company provides to Employee from time to
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2
time, and in accordance with Company's policies and procedures as published from
time to time.
(b)
REPORTING AND AUTHORITY. Employee shall report to the Company as
directed by the Company. Subject to the directions of the Company, Employee shall
have full authority and responsibility for supervising and managing to the best of his
ability, the daily affairs in his scope of work or as assigned including but not limited
to: (i) presenting to the Company all business opportunities that come to his attention
that are reasonably in the scope of business of the Company; (ii) working with the
Company to develop and approve business objectives, policies and plans that improve
the Company's profitability; (iii) communicating business objectives and plans to
subordinates, (iv) ensuring that plans and policies are promulgated to and implemented
by subordinate managers, (v) ensuring that each business plan provides those functions
required for achieving its business objectives and that each plan is properly organized,
staffed and directed to fulfill its responsibilities, (vi) assisting the Company in directing
periodic reviews of the Company's strategic position and combining this information
with corollary analysis of the Company's production and financial resources, (vii)
providing periodic financial information concerning the operations of the projects and
growth plans to the Company, and (viii) ensuring that the operation of the projects
comply with applicable laws.
2.
Effective upon Employee's participation in the Severance Plan (the "Effective Date"), all
of section 3 of the Employment Agreement, with the exception of sections 3. l(c), 3.l(h), and 3.7,
is null and void and has been superseded by the terms of the Severance Plan, such that the terms
of the Severance Plan shall exclusively govern the rights of and benefits available to Employee in
the event of a termination of employment.
3.
As of the Effective Date. section 3.l(h) of the Employment Agreement is hereby deleted
and replaced with the following:
"(h) ''NOTICE OF TERMINATION" shall mean a written notice, which includes the
effective Date of Termination and
(i)
if delivered by the Company in connection
with
the
Company's decision to terminate Employee's employment with the Company, sets
forth
in
reasonable detail the reason for termination of Employee's employment. or (ii) if delivered
by Employee
in
connection with a "Constructive Termination" as such term is defined in
the CrossFirst Bankshares. Inc. Senior Executive Severance Plan, specifies
in
reasonable
detail the basis for such resignation.
11
4.
As of the Effective Date. a new subsection 3.7 is added to section 3 of the Employment
Agreement which reads as follows:
11
3.7 SUPERSESSION OF SEVERANCE BENEFITS. In the event the Committee
designates Employee as a participant in the CrossFirst Bankshares, Inc. Senior Executive
Severance Plan (the "Severance Plan"), upon such a designation becoming effective, the terms and
conditions of the Severance Plan shall supersede the terms and conditions of this Section 3, other
than sections 3.l(c), 3.l(h), and 3.7, and the Severance Plan alone shall govern and control
Employee's entitlement to severance benefits, the amount of any severance benefits, and the
payment terms of such severance benefits.
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3
IN
WITNESS
WHEREOF,
the parties hereto have executed this Amendment,
on
the date
set forth above.
CROSSFIRST BANKSHARES, INC. CROSSFIRST BANK
NAME:
NAME:
SIGNATURE:
SIGNATURE:
TITLE:
TITLE:
EMPLOYEE
NAME:
SIGNATURE: