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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM

10-K

 

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended

December 31, 2022

 

or

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

 

_______

 

to _______

 

Commission file number

001-39028

 

CROSSFIRST BANKSHARES, INC.

 

(Exact Name of Registrant as Specified in its Charter)

Kansas

26-3212879

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

11440 Tomahawk Creek Parkway

Leawood

KS

66211

(Address of principal executive offices)

(Zip Code)

(

913

)

901-4516

 

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

CFB

The

Nasdaq

 

Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned

 

issuer, as defined in Rule 405 of the Securities Act.

 

Yes

 

☐

 

No

 

☒

Indicate by check mark if the registrant is not required to file reports pursuant

 

to Section 13 or Section 15(d) of the Act. Yes

☐

 

No

 

☒

 

Indicate by check mark whether the registrant (1) has filed all reports required

 

to be filed by Section 13 or 15(d) of the Securities Exchange Act

of 1934 during the preceding 12 months (or for such shorter period that the registrant was

 

required to file such reports), and (2) has been subject

to such filing requirements for the past 90 days.

 

Yes

 

☒

 

No

 

☐

 

Indicate by check mark whether the registrant has submitted electronically

 

every Interactive Data File required to be submitted pursuant to Rule

405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or

 

for such shorter period that the registrant was

required to submit such files).

 

Yes

 

☒

 

No

 

☐

Indicate by check mark whether the registrant is a large accelerated filer, an

 

accelerated filer, a non-accelerated filer, a smaller reporting

company, or an emerging growth company. See the definitions of

 

“large accelerated filer,” “accelerated filer,” “smaller reporting company,”

 

and

‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not

 

to use the extended transition period for complying with

any new or revised financial accounting standards provided pursuant

 

to Section 13(a) of the Exchange Act.

 

☐

 

Indicate by check mark whether the registrant has filed a report on and

 

attestation to its management’s assessment of the effectiveness of its

internal control over financial reporting under Section 404(b) of the Sarbanes

 

-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting

firm that prepared or issued its audit report.

☐

If securities are registered pursuant to Section 12(b) of the Act, indicated by check mark whether the financial statements

 

of the registrant

included in the filing reflect the correction of an error to previously issued financial

 

statements.

 

☐

 

Indicate by check mark whether any of those error corrections are restatements

 

that required a recovery analysis of incentive-based compensation

received by any of the registrant’s executive officer during the relevant recovery

 

period pursuant to §240.10D-1(b).

 

☐

 

Indicate by check mark whether the registrant is a shell company (as defined

 

in Rule 12b-2 of the Exchange Act). Yes

☐

 

No

☒

As of June 30, 2022, the aggregate market value of voting stock held by nonaffiliates

 

of the Registrant was $

598,256,894

 

(based on the June 30,

2022, closing price of CrossFirst Bankshares, Inc. Common Shares of $13.20

 

as reported on the NASDAQ Global Select Market).

As of February 23, 2023, the registrant had

48,494,877

 

shares of common stock, par value $0.01, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III of this Annual Report on Form 10-K incorporates by reference certain

information from the registrant’s definitive proxy statement with respect to its 202

 

3

 

annual meeting of stockholders, which will be filed with the

Securities and Exchange Commission within 120 days after the end of the fiscal

 

year to which this Annual Report on Form 10-K relates.

 

Table of Contents

2

CAUTIONARY NOTE

 

ABOUT FORWARD-LOOKING STATEMENTS

Statements made in this report, the annual report to shareholders of which this report

 

is made a part, other reports and proxy

statements filed with the SEC, communications to shareholders, press releases and

 

oral statements made by representatives of the Company

that are not historical in nature, or that state the Company's or management's intentions,

 

hopes, beliefs, expectations, plans, goals or

predictions of future events or performance, may constitute "forward

 

-looking statements" within the meaning of Private Securities Litigation

Reform Act of 1995. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,”

“could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,”

 

“anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,”

“projection,” “goal,” “target,” “aim,” “would,” “annualized” and

 

“outlook,” or the negative version of those words or other comparable

words or phrases of a future or forward-looking nature. These forward-looking

 

statements are not historical facts, and are based on current

expectations, estimates and projections about our industry, management’s

 

beliefs and certain assumptions made by management, many of

which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution that any such forward-looking

 

statements

are not guarantees of future performance and are subject to risks, assumptions,

 

estimates, and uncertainties that are difficult to predict.

Although we believe that the expectations reflected in these forward-looking

 

statements are reasonable as of the date made, actual results

may prove to be materially different from the results expressed or

 

implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ

 

materially from those indicated in these forward-

looking statements, including, but not limited to, the following:

• our ability to effectively execute our expansion strategy and manage our

 

growth, including identifying and consummating suitable

mergers and acquisitions and integrating merged and acquired companies;

• uncertain or unfavorable general economic or market conditions, including

 

possible slowing or recessionary economic conditions

and continuing or increasing inflation, and other conditions affecting our market

 

areas in Kansas, Missouri, Oklahoma, Texas,

Arizona, Colorado and New Mexico, including a decrease in or the volatility

 

of oil and gas prices or agricultural commodity

prices within the region;

• changes in the anticipated rate hikes by the Federal Open Market Committee;

• fluctuations in interest rates and the fair value of our investment securities,

 

which could have an adverse effect on our profitability;

• the geographic concentration of our markets in Kansas, Missouri, Oklahoma, Texas, Arizona, Colorado and New Mexico;

• concentrations of loans secured by real estate and energy located in

 

our market areas;

• risks associated with our commercial loan portfolio, including the risk for

 

deterioration in value of the general business assets that

secure such loans;

• borrower and depositor concentration risks;

• risks associated with the continued outbreak of COVID-19 and

 

its variants;

• our ability to maintain our reputation;

• our ability to successfully manage our credit risk and the sufficiency of our allowance;

• reinvestment risks associated with a significant portion of our loan portfolio

 

maturing in one year or less;

• our ability to attract, hire and retain qualified management personnel;

• our dependence on our management team, including our ability to retain executive

 

officers and key employees and their client and

community relationships;

• competition from banks, credit unions and other financial services providers;

• our ability to maintain sufficient liquidity and capital;

• system failures, service denials, cyber-attacks and security breaches;

• our ability to maintain effective internal control over financial reporting;

• employee error, fraudulent activity by employees or clients and inaccurate or incomplete

 

information about our clients and

counterparties;

• increased capital requirements imposed by banking regulators,

 

which may require us to raise capital at a time when capital is not

available on favorable terms or at all;

• costs and effects of litigation, investigations or similar matters to which we may be

 

subject, including any effect on our reputation;

• severe weather, acts of god, acts of war or terrorism;

Table of Contents

3

• compliance with governmental and regulatory requirements, including

 

the Dodd-Frank and Wall Street Consumer Protection Act

(“Dodd-Frank Act”) and other regulations relating to banking, consumer protection, securities and tax matters;

• changes in the laws, rules, regulations, interpretations or policies relating to financial

 

institutions, accounting, tax, trade, monetary

and fiscal matters, including the policies of the Federal Reserve and as a result of

 

initiatives of the current administration;

 

• risks associated with our common stock; and

• those factors set forth below under the heading "Part I, Item 1A. Risk Factors," in this Annual Report on Form 10-K

 

The foregoing factors should not be construed as exhaustive and should

 

be read together with the other cautionary statements included

in this report. Because of these risks and other uncertainties, our actual future

 

results, performance or achievements, or industry results, may

be materially different from the results indicated by the forward-looking

 

statements in this report. In addition, our past results of operations

are not necessarily indicative of our future results. Accordingly, no forward-looking statements should

 

be relied upon, which represent our

beliefs, assumptions and estimates only as of the dates on which such forward-looking

 

statements were made. Any forward-looking

statement speaks only as of the date on which it is made, and we do not undertake

 

any obligation to update or review any forward-looking

statement, whether as a result of new information, future developments

 

or otherwise, except as required by law.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

4

CrossFirst Bankshares, Inc.

2022 Form 10-K Annual Report

Table of Contents

Part

Item

Number

Section

Page

Number

I

1

Business

5

1A

Risk Factors

16

1B

Unresolved Staff Comments

29

2

Properties

29

3

Legal Proceedings

29

4

Mine Safety Disclosures

29

Information About Our Executive Officers

29

II

5

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity

Securities

30

6

[Reserved]

32

7

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

7A

Quantitative and Qualitative Disclosures about Market Risk

54

8

Financial Statements and Supplementary Data

55

Report of FORVIS, LLP Independent Registered Public Accounting Firm

56

Consolidated Financial Statements and Related Notes

Consolidated Statements of Financial Condition

58

Consolidated Statements of Operations

59

Consolidated Statements of Comprehensive (Loss) Income

60

Consolidated Statements of Stockholders’ Equity

61

Consolidated Statements of Cash Flows

62

Notes to Consolidated Financial Statements

63

9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

107

9A

Control and Procedures

107

9B

Other Information

107

9C

 

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

107

III

10

Directors, Executive Officers and Corporate Governance

108

11

Executive Compensation

108

12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

108

13

Certain Relationships and Related Party Transactions and Director Independence

109

14

Principal Accountant Fees and Services

109

IV

15

Exhibits and Financial Statement Schedules

109

(a) (1) Financial Statements - See listing in Item 8 above

(a) (2) Financial Statement Schedules - None required

(a) (3) Exhibits

16

Form 10-K Summary

111

Signatures

112

 

 

 

Table of Contents

5

Part I

ITEM 1.

 

BUSINESS

Our Company

CrossFirst Bankshares, Inc., a Kansas corporation and registered bank

 

holding company (the “Company”), is the holding company for

CrossFirst Bank (the “Bank”). The Company was initially formed as a limited liability

 

company, CrossFirst Holdings, LLC, on September 1,

2008,

 

to become the holding company for the Bank and converted to a corporation in 2017. The Bank was established

 

as a Kansas state-

chartered bank in 2007 and provides a full suite of financial services to businesses, business

 

owners, professionals, and their personal

networks through our branch offices located in Kansas, Missouri, Oklahoma, Texas,

 

Arizona,

 

Colorado and New Mexico.

Unless we state otherwise or the context otherwise requires, references

 

in the below section to “we,” “our,” “us,” “ourselves,” “our

company,” and the “Company” refer to CrossFirst Bankshares, Inc.,

 

a Kansas corporation, its predecessors and its consolidated subsidiaries.

References to “CrossFirst Bank” and the “Bank” refer to CrossFirst Bank, a Kansas chartered

 

bank and our wholly owned consolidated

subsidiary.

Since opening our first branch in 2007, we have grown organically primarily by

 

establishing new branches, attracting new clients and

expanding our relationships with existing clients, as well as through three

 

strategic acquisitions.

 

Since inception, our strategy has been to be a

trusted partner providing customized financial solutions for our clients,

 

which we believe has driven value for our stockholders.

 

We are

committed to a culture of serving our clients and communities in extraordinary

 

ways by providing personalized, relationship-based banking.

We believe that success is achieved through establishing and growing the trust of

 

our clients, employees, stockholders,

 

and communities. We

remain focused on growth and are equally focused on building stockholder

 

value through greater efficiency and increased profitability. We

intend to execute our strategic plan through the following:

•

 

Continue organic growth;

•

 

Selectively pursue opportunities to expand through acquisitions

 

or new market development;

•

 

Improve financial performance;

•

 

Attract, retain and develop talent;

•

 

Maintain a branch-light business model with strategically placed locations;

 

and

•

 

Leverage technology to enhance the client experience and improve profitability.

Developments during the Fiscal Year ended December 31, 2022

In May of 2022, the Company announced a new share repurchase program under

 

which we could repurchase up to $30 million of

Company common stock. This program remains in effect. The Company completed the share repurchase

 

program previously announced in

October 2021 during the third quarter of 2022. During 2022, the Company

 

repurchased $36 million, representing 2,448,428 common shares,

at an average price per share of $14.61 under both repurchase programs.

 

The Company announced on June 13, 2022, an agreement under

 

which CrossFirst Bank would acquire Central Bancorp, Inc.’s bank

subsidiary, Farmers & Stockmens Bank (“Central”),

 

in an all-cash transaction. The transaction was closed on November 22, 2022.

 

In June 2022, Amy Abrams was appointed as the Company’s General Counsel and Corporate Secretary.

In June of 2022, the Company announced the promotion of W. Randall Rapp, the Bank's current

 

Chief Risk and Credit Officer, to the

position of President of the Bank, to be effective July 1, 2022.

 

In his new role, Mr. Rapp has responsibility for production, credit, operations,

risk and technology of the Bank and reports to the Chief Executive Officer of

 

the Bank and the Company.

 

In connection with his promotion,

Mr. Rapp relinquished the position of Chief Risk and Credit Officer of the

 

Bank. With this promotion, the roles of President and Chief

Executive Officer of the Bank, formerly held by Michael J. Maddox, were

 

split, and Mr. Maddox continues as the Chief Executive Officer of

the Bank and President and Chief Executive Officer of the Company.

 

Jenny Payne was named Chief Risk Officer of the Bank, and Tom

Robinson was named Chief Credit Officer of the Bank.

 

We continued our expansion into high growth metro markets such as: Frisco, Phoenix,

 

Denver, and Colorado Springs, and we added

and expanded industry verticals including Sponsor Finance,

 

Financial Institutions, SBA, Residential

 

Mortgage and Franchise Finance.

 

 

 

 

Table of Contents

6

We launched our new digital banking platform in the fourth quarter, providing

 

enhanced online tools and resources for our clients. The

Q2 platform provides a responsive design with features and functionality parity

 

between online and mobile banking and gives the Company

the ability to enhance our digital client experience with additional revenue

 

generating opportunities.

Products and Services

The Bank operates as a regional bank providing a broad offering of deposit and

 

lending products to commercial and consumer clients.

The Bank’s branches are strategically located in Kansas, Missouri,

 

Oklahoma, Texas, Arizona, Colorado and New Mexico.

 

Our approach to

banking starts with our extraordinary service commitment. Our approach

 

is highly tailored to our clients with the ability to customize

products and services to meet our clients’ individual needs. In addition to our branch locations, we also offer private banking

 

solutions and

commercial banking solutions.

 

Private banking services offer clients an enhanced level of service through

 

the support of a dedicated Private

Banker. Our commercial banking teams are run by experienced business leaders who

 

understand the unique challenges and opportunities that

come from running and growing a business. Our commercial banking solutions

 

across lending, deposits and treasury management are

designed to meet the needs of our client regardless of size or industry. We serve consumer

 

clients though our branch network as well as our

digital banking products.

 

We focus on the following loan categories: (i) commercial and industrial loans,

 

including enterprise value lending; (ii) commercial real

estate loans; (iii) construction and development loans, including home builder

 

lending; (iv) residential real estate loans; (v) multifamily real

estate loans; (vi) energy loans; (vii) Small Business Administration (“SBA”) loans; (viii) consumer loans

 

;

 

and (ix) secondary market

mortgage loans.

We also offer deposit banking products including: (i) personal and business checking

 

and savings accounts; (ii) international banking

services; (iii) treasury management services; (iv) money market accounts;

 

(v) certificates of deposits; (vi) negotiable order of withdrawal

accounts; (vii) automated teller machine access; and (viii) mobile banking.

Competition

The banking and financial services industry is highly competitive, and we compete with

 

a wide range of financial institutions within

our markets, including local, regional and national commercial banks and

 

credit unions. We also compete with mortgage companies, trust

companies, brokerage firms, consumer finance companies, securities firms,

 

insurance companies, third-party payment processors, financial

technology (“Fintech”) companies, and other financial intermediaries.

 

Some of our competitors are not subject to the regulatory restrictions

and level of regulatory supervision applicable to us.

Human Capital Resources

Employee Profile

As of December 31, 2022, the Company had 465 full-time equivalent

 

employees primarily in locations across the states of Kansas,

Missouri, Oklahoma, Texas,

 

Arizona,

 

Colorado and New Mexico; however, technology has allowed us to expand our reach to include

 

a larger

demographic with more remote employees working outside of our physical locations

 

and throughout the country. None of our employees are

parties to a collective bargaining agreement, and we consider our relationship

 

with our employees to be good.

 

During fiscal year 2022 we

hired 212 employees (including as part of the acquisition of Farmers & Stockmens

 

Bank). Our regretted turnover rate was 14.6% in fiscal

year 2022, which we believe was due primarily to a competitive labor market

 

and a shortage of talent.

 

We believe a diverse

 

workforce is critical to long-term success and seek to build and maintain a diverse

 

and inclusive environment.

 

As of

December 31, 2022, approximately 61% of our current workforce

 

self-identifies as female and 39% as male.

 

As of December 31, 2022, 45%

of our executive and senior leadership team self-identifies as female.

 

Culture

We strive to attract, retain, and develop top talent with diverse knowledge, perspectives,

 

and experience to achieve our strategic

objectives.

 

Our Chief Human Resources Officer, reporting directly to our Chief Executive Officer,

 

oversees our human capital management

strategies. In addition, our Board of Directors is actively involved in our human

 

capital management in its oversight of our long-term strategy

and through its committees and engagement with management.

We have a strengths-based culture where our employees utilize their strengths

 

to set the course and are empowered to deliver

extraordinary services for our clients. We strive to maintain our high-performing

 

culture and be an “employer of choice” by creating an

inclusive environment that attracts and retains high-quality, engaged

 

employees who embody our core values of character, competence,

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7

commitment and connection. We are focused on sourcing and hiring talent that will be a

 

cultural fit to our core values and have backgrounds

that are as diverse as the clients we serve.

 

Pay Equity

We believe our

 

employees should be compensated on their experience and performance for the roles they fulfill,

 

and our goal is to

attract, retain and develop top-quality talent. To

 

deliver on that commitment, we set pay ranges based on banking market data

 

and consider

factors such as an employee’s role

 

and experience, the location of their job, and their performance. We

 

also regularly review our

compensation practices, both in terms of our overall workforce and

 

individual employees, to ensure our pay is fair and equitable.

 

Diversity, Equity and Inclusion

We believe that an equitable and inclusive environment with diverse teams supports

 

our core values and strategic initiatives.

 

We are

focused on maintaining and enhancing our inclusive culture through

 

our CrossFirst Cares program, which represents our initiatives and

efforts to support the diverse thoughts, ideas and perspectives of our employees and

 

their wellbeing. Our IDEA Champions employee

resource group is focused on promoting diversity, equity and inclusion,

 

while supporting CrossFirst’s core values and strengths-based

culture. These groups enhance an inclusive culture through company events, participation

 

in our recruitment efforts, training opportunities,

and input into our development strategies. During 2022, we provided

 

unconscious bias training for all employees.

Compensation and Benefits Program

As part of our compensation philosophy, we offer and maintain competitive

 

total rewards programs to attract and retain superior talent

throughout our market footprint. In addition to competitive base

 

pay, we also offer annual incentive opportunities, long-term incentive

opportunities, a Company-augmented Employee Stock Ownership Plan,

 

Company-matched 401(k) Plan, healthcare and insurance benefits,

health savings and flexible spending accounts, paid time off, parental

 

leave, a Volunteer Time Off (“VTO”) program, flexible work

schedules, and employee assistance programs.

Community Involvement

We build strong relationships within the communities we serve, and

 

we support the passions of our employees. We encourage our

employees to volunteer their time and talent by serving on boards and supporting

 

the communities where they live and work.

 

We understand that helping our employees devote their energies to causes that matter

 

to them, to their communities and to those

individuals who are most in need makes a broader impact. Our CrossFirst VTO program provides

 

paid leave for these volunteer activities.

 

Our spirit of employee giving is also championed through our Generous

 

Giving Program.

 

Through this program, we offer every

employee the opportunity to provide financial support for others by

 

matching up to $500 per employee gift, per year. Our Generous Giving

Program is designed to give our employees additional resources to make

 

a difference in people’s lives. Since its inception in 2017, our

Generous Giving Program donations total approximately $490

 

thousand.

We focus on giving back to the communities we serve and providing opportunities

 

to our employees to share in that effort.

 

At the

same time, we recognize that participating in these activities enriches all our

 

lives.

Workplace Health, Safety and Wellness

The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed

 

to the health,

safety and wellness of our employees. We provide our employees and their families with

 

access to a variety of flexible and convenient health

and welfare programs. This includes offering benefits to support their physical

 

and mental well-being; providing tools and resources to help

improve or maintain their health status; and offering choices where possible

 

for employees to customize their benefits to meet their needs and

the needs of their families. The COVID-19 pandemic led us to evaluate our operating

 

environment to ensure our employees were able to

continue working safely.

 

As a result, we implemented significant changes including providing flexible

 

work from home options for a large

percentage of our employees, while implementing additional safety measures

 

for employees continuing critical on-site work. We have

continued to offer these for the benefit of our employees, clients and communities.

Annually, we conduct an all-employee engagement and satisfaction

 

survey. We consistently have 90% participation in our engagement

survey, scoring in the top third of companies compared to other Gallup organizations,

 

with over 67% of our employees who are classified by

Gallup as highly engaged.

 

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8

During 2022, the Company received the WELL Health-Safety Rating through the International WELL Building Institute. This rating is

an evidence-based, third-party verified rating for all new and existing buildings

 

focused on operational policies, maintenance protocols,

stakeholder engagement, and emergency plans to address a post COVID-19

 

environment.

 

Talent Development

We prioritize and invest in creating opportunities to help our employees grow

 

and build their careers through a variety of training and

development programs. These include online, classroom and on-the-job learning formats

 

paired with an individualized development

approach.

 

A core tenet of our talent system is to both develop talent from within and supplement with external candidates. This approach has

yielded loyalty and commitment in our employee base which benefits our business,

 

our products, and our clients.

 

In 2022, over 17% of our

current employees were promoted into roles with increased responsibilities. The addition

 

of new employees and external ideas supports our

culture of continuous improvement and a diverse and inclusive workforce.

 

Our performance management framework includes monthly business and functional

 

reviews, along with one-on-one and quarterly

forward-looking goal setting and development discussions, followed by annual

 

opportunities for pay differentiation based on overall

employee performance distinction.

Supervision and Regulation

The following is a general summary of the material aspects of certain statutes and

 

regulations that are applicable to us. These

summary descriptions are not complete. Please refer to the full text of the statutes, regulations,

 

and corresponding guidance for more

information. These statutes and regulations are subject to change, and additional

 

statutes, regulations, and corresponding guidance may be

adopted. We are unable to predict future changes or the effects, if any, that these changes could have on our business or our revenues.

General

 

We are extensively regulated under U.S. federal and state law. As a result, our growth and earnings performance

 

may be affected not

only by management decisions and general economic conditions,

 

but also by federal and state statutes and by the regulations and policies of

various bank regulatory agencies, including the Office of the State Bank Commissioner

 

of Kansas, the Federal Reserve, the Federal Deposit

Insurance Corporation (“FDIC”) and the Consumer Financial Protection

 

Bureau (“CFPB”). Furthermore, tax laws administered by the

Internal Revenue Service (“IRS”) and state and local taxing authorities, accounting

 

rules developed by the Financial Accounting Standards

Board (“FASB”), securities laws administered by the Securities and Exchange

 

Commission (“SEC”) and state securities authorities and Anti-

Money Laundering (“AML”) laws enforced by the U.S. Department of

 

the Treasury also impact our business. The effect of these statutes,

regulations, regulatory policies and rules are significant to our financial condition

 

and results of operations. Further, the nature and extent of

future legislative, regulatory or other changes affecting financial institutions are

 

impossible to predict with any certainty.

Federal and state banking laws impose a comprehensive system of

 

supervision, regulation, and enforcement on the operations of

banks, their holding companies and their affiliates. These laws are intended primarily

 

for the protection of depositors, clients and the Deposit

Insurance Fund of the FDIC (“DIF”) rather than for stockholders.

 

This supervisory and regulatory framework subjects banks and bank

 

holding companies to regular examination by their respective

regulatory agencies, which results in examination reports and

 

ratings that, while not publicly available, can affect the conduct and growth of

their businesses.

 

Regulatory Capital Requirements

The federal banking agencies require that banking organizations meet several

 

risk-based capital adequacy requirements known as the

“Basel III Capital Rules.” The Basel III Capital Rules implement the Basel Committee’s December

 

2010 framework for strengthening

international capital standards and certain provisions of the Dodd

 

-Frank Act.

The Basel III Capital Rules require the Company and the Bank to comply with four minimum

 

capital standards: (i) a tier 1 leverage

ratio of at least 4.0%; (ii) a CET1 to risk-weighted assets of at least 4.5%; (iii) a tier 1

 

capital to risk-weighted assets of at least 6.0%; and (iv)

a total capital to risk-weighted assets of at least 8.0%. CET1 capital is generally

 

comprised of common stockholders’ equity and retained

earnings subject to applicable regulatory adjustments. Tier 1 capital is generally

 

comprised of CET1 and additional tier 1 capital. Additional

tier 1 capital generally includes certain noncumulative perpetual preferred

 

stock and related surplus and minority interests in equity accounts

of consolidated subsidiaries. We are permitted to include qualifying trust preferred

 

securities issued prior to May 19, 2010 as additional tier 1

capital. Total capital includes tier 1 capital (CET1 capital plus additional tier 1 capital) and tier 2

 

capital. Tier 2 capital is generally comprised

of capital instruments and related surplus meeting specified requirements,

 

and may include cumulative preferred stock and long-term

perpetual preferred stock, mandatory convertible securities, intermediate

 

preferred stock, and subordinated debt. Also included in tier 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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9

capital is the allowance for credit losses (“ACL”), formerly known as the allowance

 

for loan and lease losses (“ALLL”), limited to a

maximum of 1.25% of risk-weighted assets. The calculation of all types of regulatory

 

capital is subject to deductions and adjustments

specified in the regulations.

The Basel III Capital Rules also establish a “capital conservation buffer” of 2.5%

 

above the regulatory minimum risk-based capital

requirements. An institution is subject to limitations on certain activities, including payment of dividends, share repurchases

 

and

discretionary bonuses to executive officers, if its capital level is below the buffered

 

ratio.

The Basel III minimum capital ratios as applicable to the Bank and to the Company

 

are summarized in the table below:

Basel III

Minimum For

Capital Adequacy

Purposes

Basel III

Additional

Capital

Conservation

Buffer

Basel III Ratio

With Capital

Conservation

Buffer

Total risk based capital (total capital to risk-weighted assets)

8.00%

2.50%

10.50%

Tier 1 risk based capital (tier 1 to risk-weighted assets)

6.00

2.50

8.50

Common equity tier 1 risk based capital (CET1 to risk-weighted

 

assets)

4.50

2.50

7.00

Tier 1 leverage ratio (tier 1 to average assets)

4.00%

 

—%

 

4.00%

In determining the amount of risk-weighted assets for purposes of calculating

 

risk-based capital ratios, a banking organization’s assets,

including certain off-balance sheet assets are multiplied by a risk weight factor

 

assigned by the regulations based on perceived risks inherent

in the type of asset. As a result, higher levels of capital are required for asset categories believed to present greater risk.

As of December 31, 2022, the Company’s and the Bank’s capital ratios exceeded

 

the minimum capital adequacy guideline percentage

requirements under the Basel III Capital Rules.

 

Prompt Corrective Action

The Federal Deposit Insurance Act requires federal banking agencies to take “prompt corrective action” with respect

 

to depository

institutions that do not meet minimum capital requirements. For purposes

 

of prompt corrective action, the law establishes five capital tiers:

“well-capitalized,” “adequately-capitalized,” “under-capitalized,”

 

“significantly under-capitalized,” and “critically under-capitalized.” A

depository institution’s capital tier depends on its capital levels and certain other factors established

 

by regulation. In order to be a “well-

capitalized” depository institution, a bank must maintain a CET1 risk-based

 

capital ratio of 6.5% or more, a tier 1 risk-based capital ratio of

8% or more, a total risk-based capital ratio of 10% or more and a leverage ratio of

 

5% or more (and is not subject to any order or written

directive specifying any higher capital ratio). At each successively lower capital category, a bank

 

is subject to increased restrictions on its

operations.

 

As of December 31, 2022, the Bank met the requirements for being deemed

 

“well-capitalized” for purposes of the prompt corrective

action regulations and was not otherwise subject to any order or written directive

 

specifying any higher capital ratios.

Enforcement Powers of Federal and State Banking

 

Agencies

The federal banking regulatory agencies have broad enforcement powers,

 

including the power to terminate deposit insurance, impose

substantial fines and other civil and criminal penalties, and appoint a

 

conservator or receiver for financial institutions. Failure to comply with

applicable laws and regulations could subject us and our officers and directors to

 

administrative sanctions and potentially substantial civil

money penalties.

 

The Company

General

As a bank holding company, the Company is subject to regulation and supervision

 

by the Federal Reserve under the Bank Holding

Company Act of 1956, as amended (“BHCA”). Under the BHCA, the Company is subject to periodic examination

 

by the Federal Reserve.

The Company is required to file with the Federal Reserve periodic reports of

 

its operations and such additional information as the Federal

Reserve may require.

 

 

 

 

 

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10

Acquisitions, Activities and

 

Change in Control

The BHCA generally requires the prior approval by the Federal Reserve for any merger involving a bank holding

 

company or a bank

holding company’s acquisition of more than 5% of a class of voting securities of

 

any additional bank or bank holding company or to acquire

all or substantially all the assets of any additional bank or bank holding

 

company.

 

Federal law also prohibits any person or company from acquiring “control”

 

of an FDIC-insured depository institution or its holding

company without prior notice to the appropriate federal bank regulator.

 

“Control” is conclusively presumed to exist upon the acquisition of

25% or more of the outstanding voting securities of a bank or bank holding company, but

 

may arise under certain circumstances between 5%

and 24.99% ownership.

Permitted Activities

The BHCA generally prohibits the Company from controlling or engaging in any business other than that of banking,

 

managing and

controlling banks or furnishing services to banks and their subsidiaries. This general

 

prohibition is subject to a number of exceptions. The

principal exception allows bank holding companies to engage in, and to

 

own shares of companies engaged in, certain businesses found by the

Federal Reserve prior to November 11, 1999 to be “so closely related to banking

 

as to be a proper incident thereto.”

 

Additionally, bank holding companies that meet certain eligibility requirements

 

prescribed by the BHCA and elect to operate as

financial holding companies may engage in, or own shares in companies engaged

 

in, a wider range of nonbanking activities, including

securities and insurance underwriting and sales, merchant banking

 

and any other activity that the Federal Reserve, in consultation with the

Secretary of the Treasury, determines by regulation or order is financial in nature or

 

incidental to any such financial activity or that the

Federal Reserve determines by order to be complementary to any such financial

 

activity and does not pose a substantial risk to the safety or

soundness of depository institutions or the financial system generally. The Company

 

has not elected to be a financial holding company, and

we have not engaged in any activities determined by the Federal Reserve to be financial

 

in nature or incidental or complementary to activities

that are financial in nature.

Source of Strength

Bank holding companies, such as the Company, are required by statute to serve

 

as a source of financial strength for their subsidiary

depository institutions, by providing financial assistance to their insured depository

 

institution subsidiaries in the event of financial distress.

Under the source of strength requirement, the Company could be required to provide financial

 

assistance to the Bank should it experience

financial distress. Furthermore, the Federal Reserve has the right to order

 

a bank holding company to terminate any activity that the Federal

Reserve believes is a serious risk to the financial safety, soundness or stability of

 

any subsidiary bank. The regulators may require these and

other actions in support of controlled banks even if such action is not in the best interests of

 

the bank holding company or its stockholders.

Safe and Sound Banking Practices

Bank holding companies and their nonbanking subsidiaries are prohibited

 

from engaging in activities that represent unsafe and

unsound banking practices or that constitute a violation of law or regulations.

 

Under certain conditions the Federal Reserve may conclude

that certain actions of a bank holding company, such as a payment of a cash dividend,

 

would constitute an unsafe and unsound banking

practice. The Federal Reserve also has the authority to regulate the debt of bank holding companies,

 

including the authority to impose

interest rate ceilings and reserve requirements on such debt. Under certain

 

circumstances the Federal Reserve may require a bank holding

company to file written notice and obtain its approval prior to purchasing or redeeming

 

its equity securities, unless certain conditions are met.

Dividend Payments, Stock Redemptions and Repurchases

The Company’s ability to pay dividends to its stockholders is affected by

 

both general corporate law considerations and the

regulations and policies of the Federal Reserve applicable to bank holding companies,

 

including the Basel III Capital Rules. Generally, a

Kansas corporation may declare and pay dividends upon the shares of

 

its capital stock either out of its surplus, as defined in and computed in

accordance with K.S.A. 17-6404 and 17-6604, and amendments thereto,

 

or in case there is not any surplus, out of its net profits for the fiscal

year in which the dividend is declared or the preceding fiscal year, or both.

 

If the capital of the corporation, computed in accordance with

K.S.A. 17-6404 and 17-6604, and amendments thereto, is diminished

 

by depreciation in the value of its property, or by losses, or otherwise,

to an amount less than the aggregate amount of the capital represented by the issued

 

and outstanding stock of all classes having a preference

upon the distribution of assets, then no dividends may be paid out of such net profits

 

until the deficiency in the amount of capital represented

by the issued and outstanding stock of all classes having a preference upon the distribution

 

of assets shall have been repaired.

It is the Federal Reserve’s policy that bank holding companies should generally

 

pay dividends on common stock only out of income

available over the past year, and only if prospective earnings retention is consistent

 

with the organization’s expected future needs and

financial condition. It is also the Federal Reserve’s policy that bank holding

 

companies should not maintain dividend levels that undermine

 

 

 

 

 

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11

their ability to be a source of strength to its banking subsidiaries. Additionally, the Federal Reserve has indicated that bank

 

holding

companies should carefully review their dividend policy and has discouraged

 

payment ratios that are at maximum allowable levels unless

both asset quality and capital are very strong.

 

Bank holding companies must consult with the Federal Reserve before

 

redeeming any equity or other capital instrument included in

tier 1 or tier 2 capital prior to stated maturity, if such redemption could have a material

 

effect on the level or composition of the

organization’s capital base. In addition, bank holding companies are unable

 

to repurchase shares equal to 10% or more of their net worth if

they would not be well-capitalized (as defined by the Federal Reserve) after

 

giving effect to such repurchase. Bank holding companies

experiencing financial weaknesses, or that are at significant risk of developing

 

financial weaknesses, must consult with the Federal Reserve

before redeeming or repurchasing common stock or other regulatory

 

capital instruments.

Other Regulation

As a company whose stock is publicly traded, the Company is subject to various

 

federal and state securities laws, including the

Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the

Sarbanes-Oxley Act of 2002, and the Company files periodic reports with the Securities and Exchange Commission. In

 

addition, because the

Company’s common stock is listed with The Nasdaq Stock Market LLC, the Company

 

is subject to the listing rules of that exchange.

The Bank

General

The Bank is a Kansas state-chartered bank and is not a member bank of the Federal

 

Reserve. As a Kansas state-chartered bank, the

Bank is subject to the examination, supervision and regulation by

 

the Office of the State Bank Commissioner of Kansas (“OSBCK”), the

chartering authority for Kansas banks, and by the FDIC. The Bank is also subject to certain regulations

 

of the CFPB.

The OSBCK supervises and regulates all areas of the Bank’s operations including,

 

without limitation, the making of loans, the

issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of

 

capital adequacy requirements, the payment of

dividends, and the establishment or closing of banking offices. The FDIC is the Bank’s primary

 

federal regulatory agency, and periodically

examines the Bank’s operations and financial condition and compliance

 

with federal law. In addition, the Bank’s deposit accounts are insured

by the DIF to the maximum extent provided under federal law and FDIC regulations,

 

and the FDIC has certain enforcement powers over the

Bank.

Depositor Preference

In the event of the ‘‘liquidation or other resolution’’ of an insured depository institution, the claims of depositors of the institution,

including the claims of the FDIC as subrogee of insured depositors, and

 

certain claims for administrative expenses of the FDIC as a receiver,

will have priority over other general unsecured claims against the institution. If

 

an insured depository institution fails, insured and uninsured

depositors, along with the FDIC, will have priority in payment ahead of

 

unsecured, non-deposit creditors including the parent bank holding

company with respect to any extensions of credit they have made to that

 

insured depository institution.

Brokered Deposit and Deposit Rate Restrictions

In December of 2020, the FDIC finalized revisions to its regulations relating

 

to brokered deposits and interest rate restrictions that

apply to less than well-capitalized insured depository institutions. The final rule became

 

effective April 1, 2021 and full compliance with the

revised brokered deposit regulation was extended to January 1, 2022.

 

Well-capitalized institutions are not subject to limitations on brokered

 

deposits, while adequately-capitalized institutions are able to

accept, renew or roll over brokered deposits, only with a waiver from the

 

FDIC and subject to certain restrictions on the yield paid on such

deposits. Under-capitalized institutions are generally not permitted to

 

accept, renew, or roll over brokered deposits and are subject to a

deposit rate cap, pursuant to which the institutions would be prohibited from

 

paying in excess of the higher of (1) 75 basis points above

published national deposit rates or (2) for maturity deposits, 120

 

percent of the current yield on similar maturity U.S. Treasury obligations

and, for non-maturity deposits, the federal funds rate plus 75 basis points, unless the

 

FDIC determined that the institutions’ local market rate

was above the national rate. As of December 31, 2022, the Bank was eligible to accept brokered deposits without a waiver from

 

the FDIC

and was not subject to the deposit rate cap.

Deposit Insurance

As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums

 

to the FDIC. The FDIC has adopted a risk-

based assessment system whereby FDIC-insured depository

 

institutions pay insurance premiums at rates based on their risk classification. An

 

 

 

 

 

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12

institution’s risk classification is assigned based on its capital levels and

 

the level of supervisory concern the institution poses to the

regulators. For deposit insurance assessment purposes, an insured depository

 

institution is placed in one of four risk categories each quarter.

An institution’s assessment is determined by multiplying its assessment

 

rate by its assessment base. The total base assessment rates range

from 2.5 basis points to 42 basis points. While in the past an insured depository institution’s assessment

 

base was determined by its deposit

base, amendments to the Federal Deposit Insurance Act revised the assessment base so that it is calculated using average consolidated

 

total

assets minus average tangible equity.

Additionally, the Dodd-Frank Act altered the minimum designated reserve ratio of the DIF, increasing the minimum

 

from 1.15% to

1.35% of the estimated amount of total insured deposits, and eliminating

 

the requirement that the FDIC pay dividends to depository

institutions when the reserve ratio exceeds certain thresholds. The FDIC had until

 

September 3, 2020 to meet the 1.35% reserve ratio target,

but it announced in November 2018

 

that the DIF had reached 1.36%, exceeding the 1.35% reserve ratio target. At least semi-annually, the

FDIC updates its loss and income projections for the DIF and, if needed, may increase

 

or decrease the assessment rates, following notice and

comment on proposed rule-making. However, as of June 30, 2020,

 

the reserve ratio fell to 1.30%, below the statutory minimum of 1.35%.

 

On September 15, 2020, the FDIC adopted a Restoration Plan to restore the reserve

 

ratio to at least 1.35% within eight years. The FDIC

projects that the reserve ratio will return to 1.35% without further action by the

 

FDIC before the end of that eight-year period, but the FDIC

will closely monitor deposit balance trends, potential losses, and other factors that

 

affect the reserve ratio. As a result, the Bank’s FDIC

deposit insurance premiums could increase or decrease.

Audit Reports

Since the Bank is an insured depository institution with total assets of $1 billion

 

or more, financial statements are prepared in

accordance with Generally Accepted Accounting Principles (“GAAP”), management’s certifications signed by the Company's and the Bank’s

chief executive officer and chief accounting or financial officer concerning

 

management’s responsibility for the financial statements, and an

attestation by the auditors regarding the Bank’s internal controls must be submitted

 

to the FDIC and OSBCK. The Federal Deposit Insurance

Corporation Improvement Act of 1991 requires that the Bank (or, as explained below, the Company) have

 

an independent audit committee,

consisting of outside directors who are independent of management of the

 

Company and the Bank. The audit committee must include at least

two members with experience in banking or related financial management,

 

must have access to outside counsel and must not include

representatives of large clients. Certain insured depository institutions with total assets of

 

less than $5 billion, or $5 billion or more and a

composite CAMELS (i.e., capital adequacy, assets, management capability,

 

earnings, liquidity, sensitivity) rating of 1 or 2, may satisfy these

audit committee requirements if its holding company has an audit committee

 

that satisfies these requirements. The Company’s audit

committee satisfies these requirements.

Examination Assessments

Pursuant to the Kansas Banking Code, the expense of every regular examination,

 

together with the expense of administering the

banking and savings and loan laws, including salaries, travel expenses,

 

supplies and equipment are paid by the banks and savings and loan

associations of Kansas, which are generally allocated among them

 

based on total asset size.

Capital Requirements

Banks are generally required to maintain minimum capital ratios. For a discussion

 

of the capital requirements applicable to the Bank,

see “Regulatory Capital Requirements” above.

Bank Reserves

The Federal Reserve requires all depository institutions to maintain reserves

 

against some transaction accounts (primarily Negotiable

Order of Withdrawal (“NOW”) and Super NOW checking accounts). The balances maintained to meet

 

the reserve requirements imposed by

the Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal

 

Reserve “discount window”

as a secondary source of funds if the institution meets the Federal Reserve’s credit standards. The Federal

 

Reserve reduced the reserve

requirement to 0% effective March 26, 2020.

Dividend Payments

A primary source of funds for the Company is dividends from the Bank. The Bank is not permitted to pay a dividend to the Company

under certain circumstances, including if the Bank is under-capitalized under

 

the prompt corrective action framework or if the Bank fails to

maintain the required capital conservation buffer. The Kansas Banking Code

 

also places restrictions on the declaration of dividends by the

Bank to the Company. No dividend may be paid from the capital stock account of

 

the Bank. The current dividends of the Bank may only be

paid from undivided profits after deducting losses. Before declaring any cash dividend

 

from undivided profits, the Bank’s board of directors

must ensure that the surplus fund equals or exceeds the capital stock account. If

 

the surplus fund is less than the capital stock account, the

Bank’s board of directors may transfer 25% of the net profits of the Bank, since the

 

last preceding dividend from undivided profits, to the

 

 

 

 

 

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13

surplus fund, except no additional transfers are required once the surplus fund

 

equals or exceeds the capital stock account. Any other

dividend (whether in cash or other property) from the Bank to the Company

 

requires the prior approval of the OSBCK.

The payment of dividends by any financial institution is affected by

 

the requirement to maintain adequate capital pursuant to

applicable capital adequacy guidelines and regulations, and a financial institution

 

generally is prohibited from paying any dividends if,

following payment thereof, the institution would be under-capitalized. As described above, the Bank exceeded

 

its minimum capital

requirements under applicable regulatory guidelines as of December

 

31, 2022.

Transactions with Affiliates

The Bank is subject to Sections 23A and 23B of the Federal Reserve Act (the “Affiliates Act”) and the Federal Reserve’s

implementation of Regulation W. An affiliate of a bank under the Affiliates

 

Act is any company or entity that controls, is controlled by or is

under common control with the bank. Accordingly, transactions between the Company, the Bank and any nonbank

 

subsidiaries will be

subject to a number of restrictions. The amount of loans or extensions of credit which the Bank

 

may make to nonbank affiliates, or to third

parties secured by securities or obligations of the nonbank affiliates, are substantially

 

limited by the Affiliates Act. Such acts further restrict

the range of permissible transactions between a bank and an affiliated company. A bank and its subsidiaries may engage in certain

transactions, including loans and purchases of assets, with an affiliated company

 

only if the terms and conditions of the transaction, including

credit standards, are substantially the same as, or at least as favorable to the bank as, those prevailing

 

at the time for comparable transactions

with non-affiliated companies or, in the absence of comparable transactions, on

 

terms and conditions that would be offered to non-affiliated

companies.

Loans to Directors, Executive Officers and Principal Stockholders

The authority of the Bank to extend credit to its directors, executive officers

 

and principal stockholders, including their immediate

family members and corporations and other entities they control, is subject to

 

substantial restrictions and requirements under the Federal

Reserve’s Regulation O, as well as the Sarbanes-Oxley Act.

Limits on Loans to One Borrower

As a Kansas state-chartered bank, the Bank is subject to limits on the amount

 

of loans it can make to one borrower. With certain

limited exceptions, loans and extensions of credit from Kansas state-chartered

 

banks outstanding to any borrower (including certain related

entities of the borrower) at any one time may not exceed 25% of the capital of the bank.

 

Certain types of loans are exempt from the lending

limits, including loans fully secured by segregated deposits held by

 

the bank or bonds or notes of the United States. A Kansas state-chartered

bank may lend an additional amount if the loan is fully secured by certain types of real

 

estate. In addition to the single borrower limitation

described above, loans to a borrower and its subsidiaries generally may not exceed

 

50% of the capital of the bank. The Bank’s legal lending

limit to any one borrower was $176 million as of December 31, 2022.

Safety and Soundness Standards/Risk Management

The federal banking agencies have adopted guidelines establishing

 

operational and managerial standards to promote the safety and

soundness of federally insured depository institutions. The guidelines set forth standards

 

for internal controls, information systems, internal

audit systems, loan documentation, credit underwriting, interest rate exposure,

 

asset growth, compensation, fees and benefits, asset quality

and earnings. In general, the safety and soundness guidelines prescribe the goals to be

 

achieved in each area, and each institution is

responsible for establishing its own procedures to achieve those goals. If an institution

 

fails to comply with any of the standards set forth in

the guidelines, the financial institution’s primary federal regulator

 

may require the institution to submit a plan for achieving and maintaining

compliance. If a financial institution fails to submit an acceptable compliance

 

plan or fails in any material respect to implement a compliance

plan that has been accepted by its primary federal regulator, the regulator is required

 

to issue an order directing the institution to cure the

deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator

 

may restrict the financial institution’s rate of growth,

require the financial institution to increase its capital, restrict the rates the institution

 

pays on deposits or require the institution to take any

action the regulator deems appropriate under the circumstances. Noncompliance

 

with the standards established by the safety and soundness

guidelines may also constitute grounds for other enforcement action by

 

the federal bank regulatory agencies, including cease and desist

orders and civil money penalty assessments.

Community Reinvestment

 

Act (“CRA”)

The CRA is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs

 

of

their communities. The CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions,

 

to assess

their record of helping to meet the credit needs of their entire community, including

 

low and moderate income neighborhoods, consistent

with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting

 

its

 

 

 

 

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14

community credit needs into account when evaluating applications for, among

 

other things, domestic branches, consummating mergers or

acquisitions or holding company formations.

The federal banking agencies have adopted regulations which measure

 

a bank’s compliance with its CRA obligations on a

performance-based evaluation system. This system bases CRA ratings on an institution’s actual lending service and

 

investment performance

rather than the extent to which the institution conducts needs assessments, documents

 

community outreach or complies with other procedural

requirements. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” The

 

Bank had a CRA rating of

“satisfactory” as of its most recent CRA assessment.

Anti-Money Laundering and the Office of Foreign

 

Assets Control Regulation

The Company and the Bank must comply with the requirements of the Bank

 

Secrecy Act (“BSA”). The BSA

 

was enacted to prevent

banks and other financial service providers from being used as intermediaries

 

for, or to hide the transfer or deposit of money derived from,

drug trafficking, money laundering, and other crimes. Since its passage, the BSA has been amended several times. These amendments

include the Money Laundering Control Act of 1986, which made money laundering a criminal act, as well as the Money

 

Laundering

Suppression Act of 1994, which required regulators to develop enhanced examination procedures and increased

 

examiner training to improve

the identification of money laundering schemes in financial institutions. The USA Uniting and Strengthening America by Providing

Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“PATRIOT Act”), substantially broadened the scope of U.S.

anti-money laundering laws and regulations by imposing significant new

 

compliance and due diligence obligations, creating new crimes and

penalties and expanding the extra-territorial jurisdiction of the United

 

States. The regulations impose obligations on financial institutions to

maintain appropriate policies, procedures and controls to detect, prevent,

 

and report money laundering and terrorist financing. The

regulations include significant penalties for non-compliance. Likewise,

 

Office of Foreign Assets Control (“OFAC”) administers and enforces

economic and trade sanctions against targeted foreign countries and regimes

 

under authority of various laws, including designated foreign

countries, nationals and others. OFAC publishes lists of specially designated

 

targets and countries. Financial institutions are responsible for,

among other things, blocking accounts of and transactions with such

 

targets and countries, prohibiting unlicensed trade and financial

transactions with them and reporting blocked transactions after their occurrence.

 

Failure of a financial institution to maintain and implement

adequate anti-money laundering and OFAC programs, or to comply

 

with all of the relevant laws or regulations, could have serious legal and

reputational consequences for the institution.

Concentrations in Commercial Real Estate (“CRE”)

Concentration risk exists when financial institutions deploy too many assets to any

 

one industry or segment. Concentration stemming

from CRE is one area of regulatory concern. The CRE Concentration Guidance, provides

 

supervisory criteria, including the following

numerical indicators, to assist bank examiners in identifying banks with potentially

 

significant CRE loan concentrations that may warrant

greater supervisory scrutiny: (i) CRE loans exceeding 300% of capital and increasing

 

50% or more in the preceding three years; or (ii)

construction and land development loans exceeding 100% of capital. The CRE Concentration

 

Guidance does not limit banks’ levels of CRE

lending activities, but rather guides institutions in developing risk management

 

practices and levels of capital that are commensurate with the

level and nature of their CRE concentrations. If a concentration is present,

 

management must employ heightened risk management practices

that address the following key elements: (i) board and management oversight

 

and strategic planning; (ii) portfolio management; (iii)

development of underwriting standards; (iv) risk assessment and

 

monitoring through market analysis and stress testing; and (v) maintenance

of increased capital levels as needed to support the level of commercial real estate lending.

 

On December 18, 2015, the federal banking

agencies jointly issued a ‘‘statement on prudent risk management for commercial

 

real estate lending’’ reminding financial institutions of

developing risk management practices. See also “Risk Factors—A concentration in commercial real estate lending

 

could cause our regulators

to restrict our ability to grow” in this Form 10-K.

Consumer Financial Services

The Bank is subject to federal and state consumer protection statutes and regulations

 

promulgated under those laws, including, without

limitation, regulations issued by the CFPB. These laws and regulations could increase or decrease

 

the cost of doing business, limit or expand

permissible activities or affect the competitive balance among financial

 

institutions.

Incentive Compensation Guidance

The federal bank regulatory agencies have issued comprehensive guidance

 

intended to ensure that the incentive compensation policies

of banking organizations do not undermine the safety and soundness

 

of those organizations by encouraging excessive risk-taking. The

incentive compensation guidance sets expectations for banking organizations

 

concerning their incentive compensation arrangements and

related risk management, control and governance processes. The incentive compensation

 

guidance, which covers all employees that have the

ability to materially affect the risk profile of an organization, either individually

 

or as part of a group, is based upon three primary principles:

(i) balanced risk-taking incentives; (ii) compatibility with effective controls and

 

risk management; and (iii) strong corporate governance. Any

deficiencies in compensation practices that are identified may be incorporated

 

into the organization’s supervisory ratings, which can affect its

ability to make acquisitions or take other actions. In addition, under the incentive

 

compensation guidance, a banking organization’s federal

 

 

 

 

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15

supervisor may initiate enforcement action if the organization’s incentive

 

compensation arrangements pose a risk to the safety and soundness

of the organization. Further, the Basel III capital rules limit discretionary bonus

 

payments to bank executives if the institution’s regulatory

capital ratios fail to exceed certain thresholds. Although the federal bank regulatory agencies proposed additional rules

 

in 2016 related to

incentive compensation for all banks with more than $1 billion in assets, those rules

 

have not yet been finalized. The scope and content of the

U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near

 

future.

The Dodd-Frank Act requires public companies to include, at least once every three years, a separate non

 

-binding ‘‘say-on-pay’’ vote

in their proxy statement by which stockholders may vote on the compensation

 

of the public company’s named executive officers. In addition,

if such public companies are involved in a merger, acquisition, or consolidation,

 

or if they propose to sell or dispose of all or substantially all

of their assets, stockholders have a right to an advisory vote on any golden

 

parachute arrangements in connection with such transaction

(frequently referred to as ‘‘say-on-golden parachute’’ vote). Other provisions of the Dodd-Frank Act may impact our corporate governance.

For instance, the SEC adopted rules prohibiting the listing of any equity security of

 

a company that does not have a compensation committee

consisting solely of independent directors, subject to certain exceptions.

 

In addition, the SEC adopted rules requiring all exchange-traded

companies to adopt claw-back policies for incentive compensation paid to

 

executive officers in the event of accounting restatements based on

material non-compliance with financial reporting requirements,

 

as required under Dodd-Frank. Those rules, however, remain subject to

 

final

listing standards to be issued by national securities exchanges. Additionally, the Company is an emerging growth

 

company (“EGC”) under

the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and therefore subject to reduced disclosure requirements related to,

among other things, executive compensation.

Financial Privacy

The federal bank regulatory agencies have adopted rules that limit the ability

 

of banks and other financial institutions to disclose non-

public information about consumers to non-affiliated third parties. These limitations require

 

disclosure of privacy policies to consumers and,

in some circumstances, allow consumers to prevent disclosure of

 

certain personal information to a nonaffiliated third party. These regulations

affect how consumer information is transmitted through financial services companies

 

and conveyed to outside vendors. In addition,

consumers may also prevent disclosure of certain information among

 

affiliated companies that is assembled or used to determine eligibility

for a product or service, such as that shown on consumer credit reports and asset and

 

income information from applications. Consumers also

have the option to direct banks and other financial institutions not to share

 

information about transactions and experiences with affiliated

companies for the purpose of marketing products or services.

Impact of Monetary Policy

The monetary policy of the Federal Reserve has a significant effect on the operating

 

results of financial or bank holding companies

and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in

 

U.S.

government securities, changes in the discount rate on member bank borrowings

 

and changes in reserve requirements against member bank

deposits. These tools are used in varying combinations to influence overall growth and distribution

 

of bank loans, investments and deposits,

and their use may affect interest rates charged on loans or paid on deposits.

Other Pending and Proposed Legislation

Other legislative and regulatory initiatives which could affect the Company,

 

the Bank and the banking industry in general may be

proposed or introduced before the U.S. Congress, the Kansas Legislature and

 

other governmental bodies in the future. Such proposals, if

enacted, may further alter the structure, regulation and competitive relationship

 

among financial institutions, and may subject the Company

or the Bank to increased regulation, disclosure and reporting requirements.

 

In addition, the various banking regulatory agencies often adopt

new rules and regulations to implement and enforce existing legislation.

 

It cannot be predicted whether, or in what form, any such legislation

or regulations may be enacted or the extent to which the business of the Company

 

or the Bank would be affected thereby.

Website Access to Company

 

Reports

The Company’s annual reports on Form 10-K, quarterly reports on

 

Form 10-Q, current reports on Form 8-K, and all amendments to

those reports are available free of charge on the Company’s website (investors.crossfirstbankshares.com)

 

as soon as reasonably practicable

after such material is electronically filed with, or furnished to, the SEC. In addition,

 

copies of the Company’s annual report will be made

available, free of charge, upon written request. The Company does not intend for information

 

contained in its website to be part of this annual

report on Form 10-K.

 

 

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16

ITEM 1A.

 

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider

 

the following factors, which could materially

affect our business, financial condition, results of operations or cash flows in

 

future periods. While we believe we have identified and

discussed below the key risk factors affecting our business, there may be additional

 

risks and uncertainties not currently known to us or that

we currently deem to be immaterial that may adversely affect our business, financial

 

condition, results of operations, cash flows or share

price in the future.

Risks Relating to Our Business and Market

A decline in general business and

 

economic conditions and any regulatory responses to such conditions

 

could have a

material adverse effect on our business, financial position, results

 

of operations and growth prospects.

Our business and operations, which primarily consist of lending money

 

to clients in the form of loans and borrowing money from

clients in the form of deposits, are sensitive to general economic conditions,

 

particularly in Kansas, Missouri, Oklahoma, Texas,

 

Arizona,

Colorado and New Mexico.

 

Unfavorable or uncertain economic and market conditions, including slowing

 

or recessionary economic

conditions, may constrain our growth and profitability from our lending

 

and deposit operations, lead to credit quality concerns related to

borrower repayment ability and collateral protection and reduce demand

 

for the products and services we offer. Increases in inflation can

adversely

 

affect the value of our investment securities, increase the costs of our business operations

 

and adversely affect the ability of our

clients to repay their loans with us. The annual inflation rate in the United States has increased since 2021.

 

Our business is also significantly

affected by monetary and other regulatory policies, which are influenced by

 

macroeconomic conditions and other factors beyond our control.

The Federal Reserve Board has increased the target federal funds rate several

 

times beginning in 2022. Uncertainty surrounding the federal

fiscal policymaking process, the medium and long-term fiscal outlook of

 

the federal government and future tax rates are concerns for

businesses, consumers and investors. Adverse economic conditions and governmental policy responses to

 

such conditions could have a

material adverse effect on our business, financial position, results of operations

 

and growth prospects.

Our profitability depends on interest rates generally, and we may be adversely

 

affected by changes in market interest rates.

Our profitability depends in substantial part on our net interest income, which

 

depends on many factors that are partly or completely

outside of our control, including competition, economic conditions and

 

monetary and fiscal policies. Since March 2022, in response to

inflation, the target range for the federal funds rate has been steadily increasing.

 

As it seeks to control inflation without creating a recession,

the Federal Reserve has indicated further increases are expected.

 

If the targeted federal funds rates are increased, overall interest rates will

likely continue to rise, which will positively impact our net interest income

 

but may negatively impact our ability to originate loans and

deposits, reduce the carrying value of assets on our consolidated statements of

 

financial position, reduce the value and marketability of loan

collateral and create higher payment burdens for our borrowers (which may

 

increase potential for default). The ratio of variable- to fixed-rate

loans in our loan portfolio, the ratio of short-term (maturing at a given

 

time within 12 months) to long-term loans and the ratio of our

demand, money market and savings deposits to certificates of deposit (and their

 

time periods) are the primary factors affecting the sensitivity

of our net interest income to changes in market interest rates. Our ability

 

to attract and maintain deposits, as well as our cost of funds, has

been and will continue to be significantly affected by general economic

 

conditions. In addition, as market interest rates rise, we will continue

to have competitive pressure to increase the rates we pay on deposits. If we continue

 

to increase interest rates paid to retain deposits, our

earnings may be adversely affected. Fluctuations in

 

market rates and other market disruptions are neither predictable nor controllable

 

and

may adversely affect our financial condition, earnings and results of operation

 

s. Stockholders' equity, specifically accumulated other

comprehensive income (loss) ("AOCI"), is increased or decreased by the amount

 

of change in the estimated fair value of our securities

available-for-sale, net of deferred income taxes. Increases in long term

 

interest rates generally decrease the fair value of securities available-

for-sale, which adversely impacts stockholders' equity.

We may not be able to implement aspects of our growth strategy, which

 

may adversely affect our ability to maintain our

historical earnings trends.

We may not be able to sustain our growth at the rate we have enjoyed during

 

the past several years, which has been driven primarily

by new market expansion, the strength of commercial and industrial and

 

real estate lending in our market areas and our ability to identify and

attract high caliber experienced banking talent. A downturn in local economic market conditions, our failure to attract and retain high

performing personnel and the inability to attract core funding and quality

 

lending clients, among other factors, could limit our ability to grow

at the rate we have in the past. Additionally, expenses may grow at a greater rate than revenues. Consequently, our historical results of

operations will not necessarily be indicative of our future operations. Any limitation on our ability to grow

 

may have a negative effect on our

business, financial condition and results of operations.

 

 

 

 

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17

We may not be able to manage the risks associated with our anticipated growth

 

and expansion through de novo branching,

mergers and acquisitions, new lines of business, or new offerings

 

of services, products or product enhancements.

If our business continues to grow as anticipated, we may become more susceptible

 

to risks related to both general growth and specific

areas of growth. Generally, risks are associated with attempting to maintain

 

effective financial and operational controls as we grow, such as

maintaining appropriate loan underwriting and credit monitoring

 

procedures, maintaining an adequate allowance for loan losses, controlling

concentrations and complying with regulatory or accounting requirements. Such

 

risks may result in, among other effects, increased loan

losses, reduced earnings, potential regulatory penalties and future restrictions

 

on growth. We may also be exposed to certain risks associated

with the specific components of our growth strategy, as discussed in more detail

 

below.

Expansion through De Novo Branching

: Our growth strategy includes evaluating opportunities to grow

 

through de novo branching.

De novo branching carries with it certain potential risks, including

 

significant startup costs and anticipated initial operating losses; an

inability to gain regulatory approval; an inability to hire or retain qualified

 

senior management to successfully operate the branch and

integrate our corporate culture; challenges associated with securing attractive

 

locations at a reasonable cost; poor market reception in

locations where we do not have a preexisting reputation; unfavorable

 

local economic conditions; and the additional strain on management

resources and internal systems and controls.

 

Mergers and Acquisitions

: As part of our growth strategy, we may continue to pursue mergers and acquisitions of banks and non-

bank financial services companies within or outside our principal market

 

areas. Mergers and acquisitions, including our recently completed

acquisition of Farmers & Stockmens Bank, involve numerous risks associated

 

with entry into new markets or locations; integration and

management of the combined entities; diversion of financial and management

 

resources from existing operations; assumption of

unanticipated problems, such as non-performing loans and latent liabilities; unanticipated

 

costs; and potential future impairments to goodwill

and other intangible assets. If we finance acquisitions by issuing convertible debt

 

or equity securities, our existing stockholders may be

diluted, which could affect the market price of our common stock. As a condition to receiving regulatory approval, we may

 

also be required

to sell banking locations, which may not be preferable or may reduce the benefit

 

of the acquisition. The failure to obtain these regulatory

approvals could impact our business plans and restrict our growth.

 

New Lines of Business, Services, Products or Product Enhancements

: From time to time, we may implement or acquire new lines

of business or offer new services, products or product enhancements. There are

 

substantial risks and uncertainties associated with developing,

implementing and marketing such offerings, including significant investment

 

of financial and other resources, inability to accurately estimate

price and profitability targets, failure to realize expected benefits, regulatory

 

compliance and shifting market preferences.

 

Failure to adequately manage any of the preceding risks could have an adverse effect

 

on our business, financial condition and results

of operations.

Phase-out of the London Inter-Bank Offered Rate (“LIBOR”) and uncertainty

 

relating to alternative reference rates may

adversely affect our results of operations.

LIBOR is used extensively as a reference rate for various financial contracts,

 

including adjustable-rate loans, asset-backed securities

and interest rate swaps. In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced

 

that it intends

to stop persuading or compelling banks to submit LIBOR rates after 2021,

 

which date was later extended to June 30, 2023. Accordingly,

continuation of LIBOR cannot be guaranteed after June 30, 2023 and alternative

 

reference rates must be established. Regulators, industry

groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things,

 

published recommended fallback

language for LIBOR-linked financial instruments, identified recommended

 

alternatives for certain LIBOR rates (e.g., the Secured Overnight

Financing Rate (“SOFR”) as the recommended alternative to U.S. Dollar

 

LIBOR), and proposed implementations of the recommended

alternatives in floating rate instruments. Management continues to

 

evaluate the impact of this transition as it relates to new and existing

contracts and clients and has included fallback language in new loan documents

 

since 2017. Starting in 2021, we no longer use LIBOR on

new loans.

 

 

Uncertainty as to the nature and effect of such reforms

 

and actions may adversely affect our financial condition or results of

operations, including the value of, return on and trading market for our

 

financial assets and liabilities that are based on or are linked to

benchmarks, including any LIBOR-based securities, loans and derivatives.

 

Furthermore, there can be no assurances that we and other market

participants will be adequately prepared for an actual discontinuation

 

of benchmarks, including LIBOR, that may have an unpredictable

impact on contractual mechanics (including, but not limited to, interest rates

 

to be paid to or by us), which may also result in adversely

affecting our financial condition or results of operations.

 

Such transition may also result in litigation with counterparties impacted by

 

the

transition as well as increased regulatory scrutiny and other adverse

 

consequences. In addition, any replacement benchmark ultimately

adopted as a substitute for LIBOR, including SOFR, may behave differently

 

than LIBOR in a manner detrimental to our financial

performance. At December 31, 2022, $0.7 billion of our loans were tied to

 

LIBOR.

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18

The fair value of our investment securities can fluctuate due to factors

 

outside of our control.

As of December 31, 2022, 2021 and 2020, the fair value of our investment securities

 

portfolio was approximately $687 million,

$746 million and $655 million, respectively. Factors beyond our

 

control can significantly influence the fair value of securities in our portfolio

and may cause potential adverse changes to the fair value of these securities. These factors include,

 

but are not limited to, rating agency

actions, defaults by the issuer or with respect to the underlying securities, changes

 

in market interest rates and instability in the capital

markets. In addition, our inability to accurately predict the future performance

 

of an issuer or to efficiently respond to changing market

conditions could result in a decline in the value of our investment securities portfolio.

 

These and other factors could cause realized or

unrealized losses in future periods and declines in other comprehensive

 

income and the value of our common stock, any of which could

materially and adversely affect our business, results of operations, financial

 

condition and prospects.

 

Our business is highly susceptible to credit risk.

There are risks inherent in making any loan, including risks inherent in dealing

 

with individual borrowers, risks of non-payment, risks

resulting from uncertainties as to the future value of collateral and risks resulting from

 

changes in economic and industry conditions. There is

no assurance that our loan approval and credit risk monitoring procedures

 

are or will be adequate to reduce the inherent risks associated with

lending. Our credit administration personnel and our policies and procedures

 

may not adequately adapt to changes in economic or any other

conditions affecting clients and the quality of our loan portfolio.

 

Similarly, we have credit risk embedded

 

in our securities portfolio.

 

Adverse

credit factors could result in higher delinquencies and greater charge

 

-offs or losses in future periods which could materially and

 

adversely

impact us.

 

We have credit exposure to the energy industry.

We have credit exposure to the energy industry in each of our primary markets and

 

across the United States. A

 

downturn or lack of

growth in the energy industry and energy-related business could adversely

 

affect our clients which may lead to higher delinquencies and

greater charge-offs in future periods. Prolonged or further pricing

 

pressure on oil and gas could lead to increased credit stress in our energy

portfolio, increased losses associated with our energy portfolio, increased

 

utilization of our contractual obligations to extend credit and

weaker demand for energy lending. Such a decline or general uncertainty resulting

 

from continued volatility could have other adverse

impacts that are difficult to isolate or quantify, all of which could have a material

 

adverse effect on us. Additionally, to the extent that climate

change and responses to climate change negatively impact the businesses and

 

financial condition of our clients in the energy industry, the

credit risk associated with loans and other credit exposures to those clients may

 

increase.

A concentration in commercial real

 

estate lending could cause our regulators to restrict our ability to

 

grow.

As a part of their regulatory oversight, the federal regulators have issued guidance

 

on Concentrations in Commercial Real Estate

Lending, Sound Risk Management Practices (the “CRE Concentration Guidance”)

 

with respect to a financial institution’s concentrations in

CRE lending activities. Such guidance identifies certain concentration

 

levels that, if exceeded, will expose an institution to additional

supervisory analysis

 

The guidelines identify the following as preliminary indications of possible CRE

 

concentration risk: (i) the institution’s

total construction, land development and other land loans represent 100% or

 

more of total capital and reserves; or (ii) total CRE loans as

defined in the guidance, or Regulatory CRE, represent 300% or more of the institution’

 

s

 

total capital and reserves and the institution’s

Regulatory CRE has increased by 50% or more during the prior 36-month period. We believe

 

that the CRE Concentration Guidance is

applicable to us. Our CRE portfolio was 318%

 

of total capital and reserves at December 31, 2022. The FDIC or other federal regulators may

become concerned about our CRE loan portfolio and they could limit our ability

 

to grow by restricting approvals of new branches and other

growth opportunities or by requiring us to raise additional capital, reduce our

 

loan concentrations or undertake other remedial actions.

Many of our loans are to commercial borrowers, which have a higher

 

degree of risk than other types of loans.

As of December 31, 2022, approximately 87% of our loan portfolio

 

related to commercial-based lending. Commercial purpose loans

are often larger and involve greater risks than other types of lending. Repayment

 

of these loans often depends on the successful operation or

development of the property or business involved and are highly sensitive to

 

adverse conditions in the real estate market or the industry in

which the business operates or the general economy. Accordingly, a downturn in the real estate market or other industry

 

in which the business

operates or the general economy could impair the borrowers’ ability to repay and heightens our risk related to commercial purpose

 

loans,

particularly CRE loans. Losses incurred on a small number of commercial

 

purpose loans could have a material adverse impact on our

financial condition and results of operations due to the larger-than-average

 

size of each commercial purpose loan and collateral that is

generally less readily-marketable.

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19

Because a portion of our loan portfolio is comprised of real estate

 

loans, negative changes in the economy affecting real

estate values could impair the value of collateral securing our real

 

estate loans and result in loan and other losses.

Adverse changes affecting real estate values or operating cash flows of

 

real estate, particularly in the markets in which we operate,

could increase the credit risk associated with our loan portfolio and could

 

result in losses that adversely affect credit quality and our financial

condition and results of operation. Market value of real estate can fluctuate

 

significantly in a short period of time. Negative changes in the

economy affecting real estate values or operating cash flows in our market

 

areas could significantly impair the value and marketability of

property pledged loan collateral and may require us to increase our allowance

 

for loan losses, any of which could have a material adverse

impact on our business, results of operations and growth prospects.

Our largest loan relationships make up a significant percentage of

 

our total loan portfolio.

As of December 31, 2022, our 25 largest borrowing relationships totaled approximately

 

$1.9 billion in total commitments

(representing, in the aggregate, 24% of our total outstanding commitments

 

as of December 31, 2022). Our five largest borrowing

relationships, based on total commitments, accounted for 9% of total commitments

 

as of December 31, 2022. This concentration of

borrowers may expose us to material losses if one or more of these relationships

 

becomes delinquent or suffers default. The allowance for

loan losses may not be adequate to cover such losses and any loss or increase in the allowance

 

would negatively affect our earnings and

capital. Even if these loans are adequately collateralized, an increase in classified

 

assets could harm our reputation with our regulators and

inhibit our ability to execute our business plan.

A portion of our loan portfolio

 

is comprised of participation and syndicated transaction interests, which

 

could have an

adverse effect on our ability to monitor the lending relationships and lead

 

to an increased risk of loss.

As of December 31, 2022, we had $68 million of purchased loan participations

 

from other financial institutions and a combination of

shared national credits and syndication interests purchased totaling $440

 

million. Although we comply with our general underwriting criteria

on these loan participations and syndicated loans, these loans may have

 

a higher risk of loss than loans we originate and administer.

 

In such

transactions in which we are not the lead lender, we rely in part on the lead lender or

 

the agent, as the case may be, to monitor the

performance of the loan and provide information that we use to classify the loan and

 

associated loan loss provisions. If our underwriting or

monitoring of these loans is not sufficient, our non-performing loans may increase

 

and our earnings may decrease.

 

Our levels of non-performing assets could increase, which would adversely

 

affect our results of operations and financial

condition and could result in losses in the future.

As of December 31, 2022, our non-performing loans (which consist of non-accrual

 

loans, loans past due 90 days or more and still

accruing interest and loans modified under troubled debt restructurings that are

 

not performing in accordance with their modified terms)

totaled $12 million and our non-performing assets (which include

 

non-performing loans plus other real estate owned) totaled $13 million.

However, we can give no assurance that our non-performing assets will continue

 

to remain at these levels and we may experience increases

in non-performing assets in the future. Non-performing assets adversely

 

affect our management resources, net income, risk profile and

capital maintenance levels, efficiency ratio and returns on assets and equity, any

 

of which may adversely affect us.

Our allowance may not be adequate to cover actual credit losses on

 

loans.

A significant source of risk arises from the possibility that we could sustain losses due to loan defaults and non-performance on

 

loans.

We maintain an allowance in accordance with GAAP to provide for such defaults and other non-performance. The amount of

 

future losses is

susceptible to changes in economic, operating and other conditions, including

 

changes in interest rates and inflationary or recessionary

trends,

 

many of which are beyond our control. We early adopted the Current Expected Credit Losses

 

(“CECL”) model on January 1, 2022;

under CECL, we are required to use historical information, current conditions

 

and reasonable forecasts to estimate the expected loss over the

life of the loan. Our underwriting policies, adherence to credit monitoring processes and

 

risk management systems and controls may not

prevent unexpected losses. Our allowance may not be adequate to cover

 

actual loan losses. Moreover, any increase in our allowance will

adversely affect our net income and regulatory capital.

We rely on our senior management team and may have difficulty

 

identifying, attracting and retaining necessary personnel,

which may divert resources and limit our ability to execute our business

 

strategy and successfully grow our business.

Our continued growth and successful operation of our business depends,

 

in large part, on our ability to hire and retain highly qualified

and motivated personnel at every level. Our senior management team has

 

significant industry experience,

 

and their knowledge and

relationships would be difficult to replace in the event of departure or retirement

 

.

 

We must also hire and retain qualified banking personnel to

continue to grow our business. Competition for skilled personnel in

 

the financial services and banking industry is significant and costs

associated with incenting and retaining skilled personnel may be material

 

and continue to increase. If we are unable to hire and retain

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20

qualified personnel or successfully address management succession issues, we may

 

be unable to successfully execute our business strategy

and manage our growth, which could have a material adverse effect on our

 

business, financial condition or results of operations.

We rely on short-term funding, which can be adversely affected by local and

 

general economic conditions.

As of December 31, 2022, approximately

 

$5 billion, or 83%, of our deposits consisted of demand, savings, money market and

transaction accounts (including negotiable order of withdrawal accounts). The

 

approximately $1 billion remaining balance of deposits

consisted of certificates of deposit, of which approximately $589 million, or

 

10% of our total deposits, was due to mature within one year.

Based on our experience, we believe that our savings, money market and

 

non-interest-bearing accounts are relatively stable sources of funds.

Our ability to attract and maintain deposits, as well as our cost of funds, has been

 

and will continue to be significantly affected by general

economic conditions. In addition, as market interest rates rise, we will continue

 

to have competitive pressure to increase the rates we pay on

deposits. If we continue to increase interest rates paid to retain deposits, our earnings

 

may be adversely affected.

Our largest deposit relationships currently make up a significant percentage

 

of our deposits and the withdrawal of deposits

by our largest depositors could force us to fund our business through

 

more expensive and less stable sources.

At December 31, 2022, our 25 largest depositors accounted for 25% of our total

 

deposits and our five largest depositors accounted for

12% of our total deposits. Withdrawals of deposits by any one of our largest depositors

 

or by one of our related client groups could force us

to rely more heavily on borrowings and other sources of funding to meet business and

 

withdrawal demands, adversely affecting our net

interest margin and results of operations. Such circumstances may require

 

us raise deposit rates to attract new deposits and rely more heavily

on other funding sources that could be more expensive and less stable. Under applicable

 

regulations, if the Company was no longer “well-

capitalized,” we would be required to obtain FDIC approval to accept

 

brokered deposits and could also be subject to a deposit rate cap

prohibiting us from paying in excess of 75 basis points above national deposit rates.

Liquidity risk could impair our ability to fund operations and meet our

 

obligations as they become due and failure to

maintain sufficient liquidity could materially adversely affect our growth,

 

business, profitability and financial condition.

Liquidity is essential to our business, sufficient levels of which are required to

 

fund asset growth, serve client demand for loans, pay

our debt obligations and meet other cash commitments. Liquidity risk is the potential

 

that we will be unable to meet our obligations as they

come due because of an inability to liquidate assets or obtain adequate

 

funding without adverse conditions or consequences. Liquidity risk

can increase due to a number of factors, including an over-reliance on a particular

 

source of funding, market-wide phenomena such as market

dislocation and major disasters and a high concentration of large depositors

 

.

 

The Bank’s primary funding source is client deposits. Other

sources of funding may include advances from the Federal Home Loan Bank (“FHLB”),

 

the Federal Reserve Bank of Kansas City (“FRB”)

and our acquisition of brokered deposits, internet subscription certificates of deposit

 

and reciprocal deposits through the Intrafi Network.

Although the Bank has historically been able to replace maturing deposits

 

and advances as necessary, it might not be able to replace such

funds in the future. An inability to raise funds through deposits, borrowings, the sale of loans, securities and other sources could

 

have a

substantial negative effect on liquidity. Any substantial, unexpected or prolonged change in the level or cost of liquidity

 

could have a material

adverse effect on our financial condition and results of operations and could

 

impair our ability to fund operations and meet our obligations as

they become due and could jeopardize our financial condition.

 

We may not be able to maintain sufficient capital in the future, which

 

may adversely affect our financial condition, liquidity,

results of operations and our ability to maintain regulatory compliance.

Our business strategy calls for continued growth. We may need to raise additional capital

 

in the future to support our continued

growth and to maintain our required regulatory capital levels. Our ability

 

to raise additional capital depends on conditions in the capital

markets, economic conditions and a number of other factors, including investor

 

perceptions regarding the banking industry, market

conditions and governmental activities, our financial condition and performance

 

and competition with other financial institutions for capital

sources. We cannot guarantee that we will be able to raise additional capital in the future

 

on acceptable terms, which may adversely affect our

liquidity, growth strategy, financial condition and results of operations.

We face strong competition from banks, credit unions, financial

 

technology or Fintech companies and other financial

services providers that offer banking services, which may limit our ability

 

to attract and retain banking clients.

Competition in the banking industry generally, and in our primary markets

 

specifically, is intense. Competitors include banks and

other financial services providers, such as savings and loan institutions, brokerage

 

firms, credit unions, mortgage banks and other financial

intermediaries. In particular, we compete with larger national and regional

 

financial institutions, whose greater resources afford them many

competitive advantages.

 

Such resources may enable our competitors to achieve larger economies of

 

scale; offer more services; spend more

on advertising and technological investments; offer better lending rates to

 

clients; better diversify their loan portfolio; and have less

vulnerability to downturns in local economies and real estate markets.

 

If we are unable to offer competitive products and services as quickly

as our larger competitors, our business may be negatively affected. We also compete

 

against community banks, credit unions and nonbank

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21

financial services companies with strong local ties to small- and

 

medium-sized businesses that we target, and we may be unable to attract and

retain such clients as effectively as these smaller competitors.

 

Additionally, we face growing competition from so-called “online

 

businesses”

with few or no physical locations, including financial technology companies,

 

online banks, lenders and consumer and commercial

 

lending

platforms and automated retirement and investment service providers

 

.

 

New technology and other changes increasingly allow parties to

effectuate online financial transactions with little to no involvement from

 

banks, including bill payment, funds transfers and maintenance of

funds in brokerage accounts or mutual funds that would have historically been

 

held as bank deposits.

 

The process of eliminating banks as

intermediaries, known as “disintermediation,” could reduce our

 

income from fees and deposits. Ultimately, we may be unable to compete

successfully against current and future competitors, which may reduce

 

our revenue stream and prevent us from growing our loan and deposit

portfolios, any of which may adversely affect our results of operations and financia

 

l

 

condition.

 

Our risk management framework may not be effective in mitigating

 

risks or losses to us, and we may incur losses due to

ineffective risk management processes and strategies.

Our risk management framework is comprised of various processes, systems and

 

strategies designed to manage our risk exposure,

including credit, liquidity, interest rate, price, operational, reputation,

 

strategic and compliance risks. Our framework also includes financial

or other modeling methodologies that involve highly subjective management

 

assumptions and judgment. Our risk management framework

may not be effective under all circumstances and may not adequately mitigate

 

risks or losses, which could result in adverse regulatory

consequences and unexpected losses and our business, financial condition,

 

results of operations or growth prospects could be materially and

adversely

 

affected. We may also be subject to potentially adverse regulatory consequences.

We are required to make significant judgments, assumptions and

 

estimates in the preparation of our financial statements and

our judgments, assumptions and estimates may not be accurate.

The preparation of financial statements and related disclosures in conformity

 

with GAAP requires us to make judgments, assumptions

and estimates that affect the amounts reported in our consolidated financial

 

statements and accompanying notes. Our critical accounting

policies and estimates, which are included in the section captioned “Management’s

 

Discussion and Analysis of Financial Condition and

Results of Operations,” describe those significant accounting policies and

 

estimates used in the preparation of our consolidated financial

statements that we consider “critical” because they require judgments,

 

assumptions and estimates that materially affect our consolidated

financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ

 

significantly

from the judgments, assumptions and estimates in our critical accounting

 

policies and estimates, those events or regulatory views could have

a material impact on our consolidated financial statements and related disclosures,

 

in each case resulting in our need to revise or restate prior

period financial statements, cause damage to our reputation and the price

 

of our common stock and adversely affect our business, financial

condition and results of operations.

If we fail to maintain effective internal control over financial reporting,

 

we may not be able to report accurate and timely

financial results, which may cause material harm to our business.

Our management team is responsible for establishing and maintaining

 

adequate internal control over financial reporting and for

evaluating and reporting on that system of internal control. Our internal

 

control over financial reporting is a process designed to provide

reasonable assurance regarding the reliability of financial reporting

 

and the preparation of financial statements for external purposes in

accordance with GAAP. As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public

companies. Unless we remain an emerging growth company, our independent

 

registered public accounting firm may be required to provide

an attestation report on the effectiveness of our internal control over financial reporting. We will continue

 

to periodically test and update, as

necessary, our internal control systems, including our financial reporting

 

controls. Our actions, however, may not be sufficient to result in an

effective internal control environment,

 

and any future failure to maintain effective internal control over financial reporting could

 

impair the

reliability of our financial statements which in turn could harm our business, impair

 

investor confidence in the accuracy and completeness of

our financial reports and our access to the capital markets, cause the price of

 

our common stock to decline and subject us to regulatory

penalties.

Failure to keep pace with technological change could adversely affect

 

our business.

Advances and changes in technology could significantly affect our business, financial

 

condition, results of operations and future

prospects. The financial services industry is continually undergoing rapid technological

 

change with frequent introductions of new

technology-driven products and services. Failure to successfully keep pace

 

with technological change affecting our industry could harm our

ability to compete effectively. Many of our competitors have substantially

 

greater resources to invest in technological improvements. We face

many challenges, including the increased demand to provide clients electronic

 

access to their accounts and the cost and implementation of

systems to perform electronic banking transactions. Our ability to compete

 

depends on our ability to continue to adapt technology on a timely

and cost-effective basis to meet these demands. We may not be able to effectively or timely

 

implement new technology-driven products and

services or be successful in marketing these products and services to our clients. As these technologies are improved

 

in the future, we may be

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22

required to make significant capital expenditures in order to remain competitive,

 

which may increase our overall expenses and have a

material adverse effect on our business, financial condition, results of operations

 

and cash flows.

We are exposed to cybersecurity threats and potential security breaches

 

and our efforts to minimize or respond to such

threats may not be effective to prevent significant harm to the Company.

We conduct a portion of our business over the Internet. We rely heavily upon data processing,

 

software, communications and

information systems from a number of third parties to conduct our business. Our

 

business involves the storage and transmission of clients’

proprietary information and security breaches could expose us to the risk

 

of loss or misuse of such information, litigation and potential

liability. Our operations are vulnerable to disruptions from human

 

error, natural disasters, power loss, computer viruses, spam attacks, denial

of service attacks, unauthorized access and other unforeseen events.

 

Undiscovered data corruption could render our client information

inaccurate. Third-party or internal systems and networks may fail to operate

 

properly or become disabled due to deliberate attacks or

unintentional events. Security breaches and cyberattacks

 

may cause significant increases in operating costs, including the costs of

compensating clients for any resulting losses they may incur and the

 

costs and capital expenditures required to correct the deficiencies in and

strengthen the security of data processing and storage systems.

 

While we believe we are in compliance with all applicable privacy and data security

 

laws, an incident could put our client’s

confidential information at risk and expose us to significant liability. We

 

have been the target of data and cyber security attacks and

 

may

experience attacks in the future. While we have not experienced a material cyber-incident

 

or security breach that has been successful in

compromising our data or systems to date, we can never be certain that all of our

 

systems are entirely free from vulnerability to breaches of

security or other technological difficulties or failures. The

 

perpetual evolution of known cyber-threats requires us to devote significant

resources to maintain, regularly update and backup our data security

 

systems and processes, as we may not be able to anticipate, or

effectively implement preventative measures against, all cyber-attacks. A security breach or other cyber-incident could have an adverse

impact on, among other things, our revenue, ability to attract and maintain

 

clients and our reputation. In addition, a security breach could also

subject us to additional regulatory scrutiny and expose us to civil litigation and

 

possible financial liability, all of which could have a material

adverse effect on our business, financial condition, results of operations,

 

system availability and operational support.

We rely on client, counterparty and third-party information, which subjects

 

us to risks if that information is not accurate or

is incomplete.

In deciding whether to extend credit or enter into other transactions with clients and

 

counterparties, we rely on information furnished

to us by or on behalf of clients and counterparties, including financial statements and

 

other financial information. We also rely on

representations of clients and counterparties as to the accuracy and completeness

 

of that information and, with respect to financial statements,

on reports of independent auditors. While we have a practice of seeking to independently verify

 

client information that we use in deciding

whether to extend credit or to agree to a loan modification, including employment,

 

assets, income and credit score, not all client information

is independently verified and if any of the information that is independently

 

verified (or any other information considered in the loan review

process) is misrepresented and such misrepresentation is not detected prior

 

to loan funding, the value of the loan may be significantly lower

than expected. Whether a misrepresentation is made by the applicant, another third party

 

or one of our employees, we generally bear the risk

of loss associated with the misrepresentation. We may not detect all misrepresented information

 

in our approval process. Any such

misrepresented information could adversely affect our business, financial condition

 

and results of operations.

We are subject to certain operating risks related to employee error and

 

client, employee and third-party misconduct, which

could harm our reputation and business.

Employee error or employee and client misconduct could subject us to financial

 

losses or regulatory sanctions and seriously harm our

reputation. Misconduct by our employees could include hiding unauthorized

 

activities from us, improper or unauthorized activities on behalf

of our clients or improper use of confidential information. It is not always possible to

 

prevent employee error or misconduct and the

precautions we take to prevent and detect this activity may not be effective in

 

all cases. Because the nature of the financial services business

involves a high volume of transactions, certain errors may be repeated

 

or compounded before they are discovered and successfully rectified.

Our necessary dependence upon processing systems to record and process

 

transactions and our large transaction volume may further increase

the risk that employee errors, tampering or manipulation of those systems will result in losses

 

that are difficult to detect. Employee error or

misconduct could also subject us to financial claims. If our internal control

 

systems fail to prevent or detect an occurrence, it could have a

material adverse effect on our business, financial condition and results of operations.

 

Fraudulent activity could damage our reputation, disrupt our businesses,

 

increase our costs and cause losses.

 

As a financial institution, we are inherently exposed to operational risk in the form of

 

theft and other fraudulent activity by employees,

clients and other third parties targeting us and our clients or data. Such activity

 

may take many forms, including check fraud, electronic fraud,

wire fraud, phishing, social engineering and other dishonest acts. Although the Company devotes substantial resources

 

to maintaining

effective policies and internal controls to identify and prevent such incidents,

 

given the increasing sophistication of possible perpetrators, the

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23

Company may experience financial losses or reputational harm as a result of

 

fraud. In addition, we may be required to make significant

capital expenditures in order to modify and enhance our protective measures or

 

to investigate and remediate fraudulent activity. Although we

have not experienced any material business or reputational harm as a result of fraudulent

 

activities in the past, the occurrence of fraudulent

activity could damage our reputation, disrupt our business, increase

 

our costs and cause losses in the future.

Our operations could be interrupted if our third-party service providers

 

experience difficulty, terminate their services or fail

to comply with banking regulations.

We depend, to a significant extent, on a number of relationships with third-party

 

service providers. Specifically, we receive core

systems processing, essential web hosting and other internet systems, loan

 

and deposit processing and other processing services from third-

party service providers. If these third-party service providers experience

 

financial, operational or technological difficulties or terminate their

services and we are unable to replace them with other service providers,

 

our operations could be interrupted. If an interruption were to

continue for a significant period of time, our business, financial condition

 

and results of operations could be adversely affected, perhaps

materially. Even if we are able to replace our service providers, it may be at a higher

 

cost to us, which could adversely affect our business,

financial condition and results of operations.

We follow a relationship-based operating model and negative public opinion

 

could damage our reputation and adversely

impact our earnings.

Reputation risk, or the risk to our business, earnings and capital from negative

 

public opinion, is inherent in our business. Negative

public opinion can result from our actual or alleged conduct in any number

 

of activities, including lending practices, corporate governance,

acquisitions, and from actions taken by government regulators and community

 

organizations in response to those activities. Negative public

opinion can adversely affect our ability to keep and attract clients and employees

 

and can expose us to litigation and regulatory action and

adversely affect our results of operations. Although we take steps to minimize reputation risk in dealing with our

 

clients and communities,

this risk will always be present given the nature of our business.

If third parties infringe upon our intellectual property or if we were

 

to infringe upon the intellectual property of third parties,

we may expend significant resources enforcing or defending our rights or

 

suffer competitive injury.

We rely on a combination of copyright, trademark, trade secret laws and confidentiality

 

provisions to establish and protect our

intellectual property rights. If we fail to successfully maintain, protect and

 

enforce our intellectual property rights, our competitive position

could suffer. Similarly, if we were to infringe on the intellectual property rights of

 

others, our competitive position could suffer. Third parties

may challenge, invalidate, circumvent, infringe or misappropriate our

 

intellectual property, or such intellectual property may not be sufficient

to permit us to take advantage of current market trends or otherwise to provide

 

competitive advantages, which could result in costly redesign

efforts, discontinuance of certain product or service offerings or other

 

competitive harm.

We may also be required to spend significant resources to monitor and police our

 

intellectual property rights. Some of our competitors

may independently develop similar technology, duplicate our products

 

or services or design around our intellectual property and in such

cases we may not be able to assert our intellectual property rights against such parties.

 

Further, our contractual arrangements may not

effectively prevent disclosure of our confidential information or provide

 

an adequate remedy in the event of unauthorized disclosure of our

confidential or proprietary information. We may have to litigate to enforce or determine

 

the scope and enforceability of our intellectual

property rights, trade secrets and know-how, which could be time-consuming

 

and expensive, could cause a diversion of resources and may

not prove successful. The loss of intellectual property protection or the inability

 

to obtain rights with respect to third-party intellectual

property could harm our business and ability to compete. In addition, because

 

of the rapid pace of technological change in our industry,

aspects of our business and our products and services rely on technologies developed

 

or licensed by third parties and we may not be able to

obtain or continue to obtain licenses and technologies from these third parties on reasonable

 

terms or at all.

 

We may be exposed to risk of environmental liabilities or failure to comply with

 

regulatory requirements with respect to

properties to which we take title.

In the course of our business, we may foreclose and take title to real estate and

 

these properties could subject us to environmental

liabilities and other federal, state or local regulatory requirements, such as the Americans with Disabilities Act. We do not know whether

existing requirements will change or whether compliance with future requirements

 

will involve significant expenditures. We may be held

liable to a governmental entity or to third parties for property damage, personal

 

injury, investigation and clean-up costs incurred by these

parties in connection with environmental contamination, or we may be

 

required to investigate or clean up hazardous or toxic substances, or

chemical releases at a property. The costs associated with these investigation or remediation

 

activities could be substantial. In addition, if we

are the owner or former owner of a contaminated site, we may be subject to claims and

 

damages from third parties related to environmental

contamination emanating from the property. In addition, we could be

 

required to cure deficiencies with local building codes, requirements

under the Americans with Disabilities Act, or other federal, state or local property regulation requirements. If we ever become subject to

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24

significant environmental liabilities or costs or fail to comply with regulatory requirements

 

with respect to these properties, our business,

financial condition, liquidity and results of operations could be materially

 

and adversely affected.

The costs and effects of litigation, regulatory actions, investigations

 

or similar matters, or adverse facts and developments

related thereto, could materially affect our business, operating results

 

and financial condition.

We may be involved from time to time in a variety of litigation, investigations or

 

similar matters arising out of our business. It is

inherently difficult to assess the outcome of these matters and we may

 

not prevail in proceedings or litigation. Insurance may not cover all

such claims or losses, our indemnification rights may not be honored and

 

we may suffer damage to our reputation, regardless of the merit or

eventual outcome of a claim. The ultimate judgments or settlements in any litigation or investigation

 

could have a material adverse effect on

our business, financial condition and results of operations. In addition,

 

premiums for insurance covering the financial and banking sectors

 

are

rising. We may not be able to obtain appropriate types or levels of insurance in the future, nor may

 

we be able to obtain adequate replacement

policies with acceptable terms or at historic rates, if at all.

We also participated in the Paycheck Protection Program, or PPP, a government

 

lending program implemented to aid individuals and

businesses in connection with the COVID-19 pandemic. As of December 31, 2022, approximately $500 million

 

have been forgiven by the

Small Business Administration, and we continued to hold PPP loans receivable of $3 million. We have credit risk on PPP loans if a

determination is made by the Small Business Administration that there is a deficiency in the manner in which a PPP loan was originated,

funded, or serviced by us, such as an issue with the eligibility of a borrower to receive

 

a PPP loan. Since the inception of the PPP, many

banks have been subject to litigation related to agent fees and application processing.

 

We and other banks may also be subject to the risk of

litigation in connection with other aspects of the PPP, including but not

 

limited to borrowers seeking forgiveness of their loans. As a result of

our ongoing and future participation in the PPP and similar government stimulus and relief programs, we may

 

experience losses arising from

fraud, litigation or regulatory action.

Financial counterparties expose the Company to risks.

We maintain correspondent bank relationships, manage certain loan

 

participations, engage in securities transactions and engage in

other activities with financial counterparties that are customary to our

 

industry. Many of these transactions expose us to counterparty credit,

liquidity and/or reputational risk in the event of default by the counterparty,

 

negative publicity and complaints about the counterparty or the

financial services industry in general. Although we seek to manage these risks through internal controls and procedures,

 

we may experience

loss or interruption of business, damage to our reputation, or incur additional

 

costs or liabilities as a result of unforeseen events with these

counterparties. Any financial cost, liability or reputational damage could have a material adverse effect on our

 

business, which in turn, could

have a material adverse effect on our financial condition and results of operations.

Severe weather, natural disasters, pandemics and other external events could

 

significantly impact our business.

Severe weather, including tornadoes, droughts and hailstorms, as well as wildfires

 

and other natural disasters, pandemics, acts of war

or terrorism and other adverse external events could have a significant impact on

 

our ability to conduct business. Such events could affect the

stability of our deposit base, impair the ability of borrowers to repay outstanding

 

loans, impair the value of collateral securing loans, cause

significant property damage, result in loss of revenue or cause us to incur additional

 

expenses. Operations in our markets could be disrupted

by both the evacuation of large portions of the population as well as damage or

 

lack of access to our banking and operation facilities. Military

and political conflicts, including the current military conflict between Russia and

 

Ukraine, may increase volatility in commodity and energy

prices, create supply chain issues and cause instability in financial markets, which

 

may adversely affect us and our clients. Other severe

weather or natural disasters, pandemics, acts of war or terrorism or other adverse

 

external events may occur in the future. Although

management has established business continuity plans and procedures, the

 

occurrence of any such events could have a material adverse effect

on our business, financial condition and results of operations.

The further spread of COVID-19 and its variants may adversely impact our

 

business, financial condition and results of

operations in the short-term and for the foreseeable future.

The COVID-19 pandemic caused significant disruption to economic

 

activity and financial markets and adversely impacted our

business, financial condition and results of operations. Given the ongoing

 

and dynamic nature of COVID-19 and its variants, the ultimate

effects on the broader economy and the markets in which we serve continue to be uncertain

 

and difficult to predict. Future impacts to our

business and clients could be widespread and material, such as increased unemployment,

 

continued supply-chain interruptions, declines in

demand for loans and other banking services and products, reduction

 

in business activity and financial transactions, increased commercial

property vacancy rates, declines in the value of loan collateral, including energy

 

and real-estate collateral, declines in the credit quality of our

loan portfolio, volatile performance of our investment securities portfolio,

 

and overall economic and financial market instability. In addition,

actions taken by governmental and regulatory authorities in response to the

 

pandemic have impacted, and may continue to impact, the

banking and financial services industries. Additional regulation may be enacted in the future that could further

 

impact our business.

 

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25

Risks Relating to Our Regulatory Environment

We are subject to extensive regulation, which increases the cost and

 

expense of compliance and could limit or restrict our

activities, which in turn may adversely impact our earnings and ability

 

to grow.

We operate in a highly regulated environment and are subject to regulation,

 

supervision and examination by a number of governmental

regulatory agencies, including, with respect to the Bank, the FDIC and the

 

OSBCK and, with respect to the Company, the Federal Reserve.

Regulations adopted by these agencies govern a comprehensive range of

 

matters relating to ownership and control of our shares, our

acquisition of other companies and businesses, permissible activities for

 

us to engage in, maintenance of adequate capital levels, dividend

payments and other aspects of our operations. Bank regulators possess broad authority

 

to prevent or remedy unsafe or unsound practices or

violations of law. If, as a result of an examination, a banking agency determines

 

that an aspect of our operations is unsatisfactory, or that we

are, or our management is, in violation of any law or regulation, they may

 

take a number of different remedial actions as they deem

appropriate. These actions include the power to enjoin ‘‘unsafe or unsound’’ practices, to require affirmative action to correct any conditions

resulting from any violation or practice, to issue an administrative order that

 

can be judicially enforced, to direct an increase in our capital, to

restrict our growth, to assess civil money penalties against us or our officers or directors,

 

to fine or remove officers and directors and, if it is

concluded that such conditions cannot be corrected or there is an imminent

 

risk of loss to depositors, to terminate the Bank’s FDIC deposit

insurance and place the Bank into receivership or conservatorship. Any regulatory action against us could

 

have a material adverse effect on

our business, financial condition and results of operations.

Government policy, legislation and regulation, particularly monetary

 

policy from the Federal Reserve, significantly affect economic

growth and financial operations, including our distribution of credit, bank

 

loans, investments, deposits, product offerings and disclosures,

interest rates and bankruptcy proceedings for consumer residential real

 

estate mortgages. The laws and regulations applicable to the banking

industry could change at any time and we cannot predict the effects of these changes

 

on our business, profitability or growth strategy.

Increased regulation could increase our cost of compliance, adversely

 

affect profitability and inhibit our ability to conduct business consistent

with historical performance. If we do not comply with governmental regulations,

 

we may be subject to fines, penalties, lawsuits or material

restrictions on our businesses and growth that may damage our reputation

 

and adversely affect our business operations. Proposed legislative

and regulatory actions may not occur within expected time frames, or at all, which

 

creates additional uncertainty for our business and

industry.

 

Accordingly, legislative and regulatory actions taken now or in

 

the future could have a material adverse impact on our business,

financial condition and results of operation.

Many of our expansion and growth plans require regulatory approvals

 

and failure to obtain them may restrict our growth.

As part of our growth strategy, we may expand our business by pursuing

 

strategic acquisitions of financial institutions, adding

branches and pursuing acquisitions of other complementary businesses. Generally,

 

we must receive federal and state regulatory approval

before we can acquire an FDIC-insured depository institution or

 

related business. In determining whether to approve a proposed acquisition,

federal and state banking regulators will consider, among other factors,

 

the effect of the acquisition on competition, our financial condition,

our future prospects and the impact of the proposal on U.S. financial stability. The regulators also review

 

current and projected capital ratios,

the competence, experience and integrity of management and its record

 

of compliance with laws and regulations, the convenience and needs

of the communities to be served and the effectiveness of the acquiring institution

 

in combating money laundering activities.

 

The Federal Reserve may require the Company to commit capital resources

 

to support the Bank.

As a matter of policy, the Federal Reserve expects a bank holding company to act

 

as a source of financial and managerial strength to

its subsidiary banks.

 

The Federal Reserve may charge the bank holding company with engaging in unsafe

 

and unsound practices for failure to

adequately commit resources to a subsidiary bank. Accordingly, we may be required to make capital injections

 

into a troubled subsidiary

bank, even if such contribution creates a detriment to the Company or its stockholders.

 

If we do not have sufficient resources on hand to fund

the capital injection, we may be required to borrow funds or raise capital.

 

Any such loans are subordinate in right of payment to deposits and

to certain indebtedness of the subsidiary bank. In the event of bankruptcy of

 

the bank holding company, claims based upon any commitments

to fund capital injections are entitled to a priority of payment over claims made by

 

general unsecured creditors, including holders of

indebtedness. Thus, any borrowing incurred by the Company to make required capital

 

injections to the Bank could adversely impact our

financial condition, results of operations and future prospects. Additionally, under the Financial Institutions Reform

 

Recovery and

Enforcement Act of 1989 (“FIRREA”), losses caused by a failing bank subsidiary might be charged to the capital of an

 

affiliate bank.

Moreover, any bank operating under the Company’s common control

 

may also be required to contribute capital to a failing affiliate bank

within the Company’s control group. This is known as FIRREA’s “cross-guarantee”

 

provision. The Company currently has one bank

subsidiary.

The Company and the Bank are subject to stringent capital requirements

 

that may limit our operations and potential growth.

The Company and the Bank are subject to various regulatory capital requirements.

 

Failure to meet minimum capital requirements will

result in certain mandatory and discretionary actions by regulators that, if undertaken,

 

could have a direct material effect on our financial

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26

statements. Under capital adequacy guidelines and the regulatory

 

framework for prompt corrective action, the Company and the Bank must

meet specific capital guidelines that involve quantitative measures of our

 

assets, liabilities and certain off-balance sheet commitments as

calculated under these regulations. In order to be a “well-capitalized” depository

 

institution under prompt corrective action standards (but

without taking into account the capital conservation buffer requirement described

 

below), a bank must maintain a CET1 risk-based capital

ratio of 6.5% or more, a tier 1 risk-based capital ratio of 8.0% or more, a total risk-based

 

capital ratio of 10.0% or more and a leverage ratio

of 5.0% or more (and is not subject to any order or written directive specifying

 

any higher capital ratio). The failure to meet the established

capital requirements under the prompt corrective action framework could result

 

in one or more of our regulators placing limitations or

conditions on our activities, including our growth initiatives, or restricting

 

the commencement of new activities and such failure could

subject us to a variety of enforcement remedies available to the federal

 

regulatory authorities, including limiting our ability to pay dividends,

issuing a directive to increase our capital and terminating the Bank’s FDIC deposit

 

insurance, which is critical to the continued operation of

the Bank.

 

Including the capital conservation buffer requirement, the Company

 

and the Bank must effectively maintain a CET1 capital ratio of

7.0% or more, a tier 1 risk-based capital ratio of 8.5% or more, a total risk-based

 

capital ratio of 10.5% or more and, for the Bank, a leverage

ratio of 5.0% or more and for the Company, a leverage ratio of 4.0% or more.

 

Many factors affect the calculation of our risk-based assets and

our ability to maintain the level of capital required to achieve acceptable capital

 

ratios, such as increases to our risk-weighted assets, loan

impairments, loan losses exceeding the amount reserved for such losses and

 

other factors that decrease our capital, thereby reducing

 

the level

of the applicable ratios. Our failure to remain well-capitalized could affect client

 

and investor confidence, our ability to grow, our costs of

funds, the interest rates that we pay on deposits, FDIC insurance costs, our

 

ability to pay dividends on common stock, our ability to make

acquisitions and our business, results of operations and financial condition.

 

Higher FDIC deposit insurance premiums and assessments could adversely

 

affect our financial condition.

Our deposits are insured up to applicable limits by the DIF and are subject

 

to deposit insurance assessments to maintain deposit

insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the

 

FDIC. Growth in

insured deposits at FDIC-insured financial institutions in recent years caused

 

the ratio of the DIF to total insured deposits to fall below the

current statutory minimum, and the FDIC has approved an increase in the base

 

assessment rates to increase the likelihood that the reserve

ratio of the DIF reaches the statutory minimum level by the statutory deadline. Although we cannot predict what

 

the insurance assessment

rates will be in the future, either a deterioration in our risk-based capital ratios or

 

further adjustments to the base assessment rates could have

a material adverse impact on our business, financial condition, results of operations

 

and cash flows.

We face a risk of noncompliance and enforcement action with respect

 

to the Bank Secrecy Act and other anti-money

laundering statutes and regulations.

The BSA, the PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and

 

maintain

an effective anti-money laundering program and to file reports such as suspicious

 

activity reports and currency transaction reports. Violation

of such requirements may result in significant civil money penalties imposed

 

by federal banking agencies and the U.S. Department of the

Treasury's Financial Crimes Enforcement Network, which agencies

 

have recently engaged in coordinated enforcement efforts against banks

and other financial services providers with the U.S. Department of Justice (“DOJ”), the

 

Drug Enforcement Administration and the IRS. We

are also subject to increased scrutiny of compliance with the rules enforced

 

by the OFAC, which may require sanctions for dealing with

certain persons or countries. If the policies, procedures and systems of our

 

company, or any of our subsidiaries, are deemed deficient, we

would be subject to fines and regulatory actions, which may include restrictions

 

on our ability to pay dividends and requirements to obtain

regulatory approvals to proceed with certain aspects of our business plan, including

 

our acquisition plans. Failure to maintain and implement

adequate programs to combat money laundering and terrorist financing

 

could also have serious reputational consequences for us. Any of

these results could have a material adverse effect on our business, financial condition,

 

results of operations and growth prospects.

 

Regulations relating to privacy, information security and data protection

 

could increase our costs, affect or limit how we

collect and use personal information and adversely affect our business

 

opportunities.

We are subject to various privacy, information security and data protection laws, including

 

requirements concerning security breach

notification and we could be negatively impacted by these laws. For example,

 

our business is subject to the Gramm-Leach-Bliley Act which,

among other things: (i) imposes certain limitations on our ability to share non-public

 

personal information about our clients with non-

affiliated third parties; (ii) requires that we provide certain disclosures to clients about

 

our information collection, sharing and security

practices and afford clients the right to “opt out” of any information sharing by us with

 

non-affiliated third parties (with certain exceptions);

and (iii) requires that we develop, implement and maintain a written comprehensive

 

information security program containing safeguards that

are appropriate based on our size and complexity, the nature and scope of

 

our activities and the sensitivity of client information we process,

as well as plans for responding to data security breaches. Many state and

 

federal banking regulators, states and foreign countries have also

enacted data security breach notification requirements with varying levels

 

of individual, consumer, regulatory or law enforcement

notification in certain circumstances in the event of a security breach. Moreover,

 

legislators and regulators in the United States and other

countries are increasingly adopting or revising privacy, information security

 

and data protection laws that potentially could have a significant

impact on our current and planned privacy, data protection and information

 

security-related practices, our collection, use, sharing, retention

 

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27

and safeguarding of client or employee information and some of our current

 

or planned business activities. This could also increase our costs

of compliance and business operations and could reduce income from certain

 

business initiatives. This includes increased privacy-related

enforcement activity at the federal level by the Federal Trade Commission, as well as at the state level.

Compliance with current or future privacy, data protection and information

 

security laws (including those regarding security breach

notification) affecting client or employee data to which we are subject could result

 

in higher compliance and technology costs and could

restrict our ability to provide certain products and services, which could have

 

a material adverse effect on our business, financial conditions

or results of operations. Our failure to comply with privacy, data protection and

 

information security laws could result in potentially

significant regulatory or governmental investigations or actions, litigation,

 

fines, sanctions and damage to our reputation, which could have a

material adverse effect on our business, financial condition or results of operations.

We face increased risk under the terms of the CRA

 

as we accept additional deposits in new geographic markets.

Under the terms of the CRA, each appropriate federal bank regulatory

 

agency is required, in connection with its examination of a

bank, to assess such bank’s record in assessing and meeting the credit needs of

 

the communities served by that bank, including low- and

moderate-income neighborhoods. During these examinations, the regulatory

 

agency rates such bank’s compliance with the CRA as

“Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.”

 

The Bank had a CRA rating of “Satisfactory” as of its

most recent CRA assessment. The regulatory agency’s assessment of an institution’s record is part of the regulatory agency’s consideration

 

of

applications to acquire, merge or consolidate with another banking

 

institution or its holding company, or to open or relocate a branch office.

As we accept additional deposits in new geographic markets, we will be required

 

to maintain an acceptable CRA rating, which may be

difficult.

We are subject to numerous laws designed to protect consumers, including

 

the CRA and fair lending laws and

 

failure to

comply with these laws could lead to a wide variety of sanctions.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose

nondiscriminatory lending requirements on financial institutions. The U.S. Department

 

of Justice and other federal agencies are responsible

for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending

laws and regulations could result in a wide variety of sanctions, including damages

 

and civil money penalties, injunctive relief, restrictions

on mergers and acquisitions activity, restrictions on expansion and restrictions

 

on entering new business lines. Private parties also could

challenge an institution’s performance under fair lending laws in private class action

 

litigation. Such actions could have a material adverse

effect on our business, financial condition, results of operations and

 

future prospects.

 

Risks Related to Our Common Stock

The price of our common stock could be volatile.

The market price of our common stock may be volatile and could

 

be subject to wide price fluctuations in response to various

factors, some of which are beyond our control. These factors include, among other

 

things, actual or anticipated variations in our quarterly or

annual results of operations; recommendations by securities analysts; operating

 

performance or fluctuations in the stock price performance of

other companies that investors deem comparable to us; news reports relating

 

to trends, concerns and other issues in the financial services

industry generally; conditions in the banking industry such as credit quality

 

and monetary policies; domestic and international economic

factors unrelated to our performance; perceptions, general market conditions

 

and, in particular, developments related to market conditions for

the financial services industry; loss of investor confidence in the market

 

for stocks; new technology used, or services offered, by competitors;

loss of investor confidence and changes in government regulations. If any of the foregoing

 

occurs, it could cause our stock price to fall and

may expose us to lawsuits that, even if unsuccessful, could be costly to defend

 

and be a distraction to management.

Kansas law and the provisions of our articles of incorporation and bylaws

 

may have an anti-takeover effect and there are

substantial regulatory limitations on changes of control of bank holding

 

companies.

Kansas corporate law and provisions of our articles of incorporation and our bylaws

 

could make it more difficult for a third party to

acquire us, even if doing so would be perceived to be beneficial by our stockholders.

 

Furthermore, with certain limited exceptions, federal

regulations prohibit a person or company or a group of persons deemed to be

 

“acting in concert” from, directly or indirectly, acquiring more

than 10% (5% if the acquirer is a bank holding company) of any class of our voting

 

stock or obtaining the ability to control in any manner the

election of a majority of our directors or otherwise direct the management or

 

policies of our Company without prior notice or application to

and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with

 

these requirements, if

applicable, in connection with any purchase of shares of our common stock.

 

Collectively, provisions of our articles of incorporation and

bylaws and other statutory and regulatory provisions may delay, prevent or

 

deter a merger, acquisition, tender offer, proxy contest or other

transaction that might otherwise result in our stockholders receiving

 

a premium over the market price for their common stock. Moreover, the

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28

combination of these provisions effectively inhibits certain business combinations,

 

which, in turn, could adversely affect the market price of

our common stock.

Future equity issuances could result in dilution, which could cause

 

the price of our shares of common stock to decline.

We are generally not restricted from issuing additional shares of stock, up

 

to the 200,000,000 shares of voting common stock and

5,000,000

 

shares of preferred stock authorized in our articles of incorporation. We may issue additional

 

shares of our common stock in the

future in various transactions, including pursuant to current or future

 

equity compensation plans, upon conversions of preferred stock or debt,

upon exercise of warrants or in connection with future acquisitions or financings.

 

If we choose to issue additional shares of our common

stock, or securities convertible into shares of our common stock, for any reason,

 

the issuance would have a dilutive effect on the holders of

our common stock and could have a material negative effect on the market

 

price of our common stock.

We may issue shares of preferred stock in the future, which could

 

make it difficult for another company to acquire us or

could otherwise adversely affect holders of our common stock.

Our articles of incorporation authorize us to issue up to 5,000,000 shares

 

of one or more series of preferred stock. Our Board of

Directors has the power to set the terms of any series of preferred stock

 

that may be issued, including voting rights, dividend rights,

conversion rights, preferences over our voting common stock with respect

 

to dividends or in the event of a dissolution, liquidation or winding

up and other terms. If we issue preferred stock in the future that has preference over

 

our common stock with respect to payment of dividends

or upon our liquidation, dissolution or winding up, the rights of the holders

 

of our common stock or the market price of our common stock

could be adversely affected.

Our dividend policy may change without notice,

 

and our future ability to pay dividends is subject to restrictions.

Holders of our common stock are entitled to receive only such dividends as our

 

Board of Directors may declare out of funds legally

available for such payments. The Federal Reserve has indicated that bank holding

 

companies should carefully review their dividend policy in

relation to the organization’s

 

overall asset quality, current and

 

prospective earnings and capital level, composition and quality.

 

Furthermore,

the Federal Reserve may prohibit payment of dividends that are deemed

 

unsafe or unsound practice.

 

Accordingly, any declaration and

payment of dividends on our common stock will depend upon many factors,

 

including our earnings and financial condition, liquidity and

capital requirements, the general economic and regulatory climate, our

 

ability to service any equity or debt obligations senior to our common

stock, our capital management policies and strategic plans; our growth

 

initiatives; and other factors deemed relevant by our Board of

Directors.

 

Any such factor could adversely affect the amount of dividends, if any, paid to our

 

common stockholders. If declared, dividends

will be payable to the holders of shares of our common stock on a pro rata basis in accordance

 

with their shares held. If preferred shares are

issued, such shares may be entitled to priority over the common shares as to dividends.

 

Other than the stock dividend provided to our

stockholders pursuant to our two-for-one stock split in 2018, we have no history

 

of paying dividends to holders of our common stock.

We are a bank holding company and our only source of cash, other

 

than further issuances of securities, is distributions from

our wholly owned subsidiaries.

We are a bank holding company with no material activities other than activities incidental

 

to holding the common stock of the Bank.

Our principal source of funds to pay distributions on our common

 

stock and service any of our obligations, other than further issuances of

securities, would be dividends received from our wholly owned subsidiaries.

 

Furthermore, our wholly owned subsidiaries are not obligated to

pay dividends to us and any dividends paid to us would depend on the earnings

 

or financial condition of our wholly owned subsidiaries and

various business considerations. As is the case with all financial institutions, the profitability of our wholly owned

 

subsidiaries is subject to

the fluctuating cost and availability of money, changes in interest rates and economic

 

conditions in general. In addition, various federal and

state statutes limit the amount of dividends that our wholly owned subsidiaries

 

may pay to the Company without regulatory approval.

As an emerging growth company, or EGC, we utilize certain exemptions

 

from disclosure requirements which could make our

shares less attractive to investors and make it more difficult to compare

 

our performance with other public companies.

As an “emerging growth company”, we may take advantage of certain exemptions from

 

various reporting requirements including, but

not limited to, not being required to comply with the auditor attestation requirements

 

of Section 404 of the Sarbanes-Oxley Act of 2002 and

reduced disclosure obligations regarding executive compensation.

 

In addition, as an emerging growth company we are not required to

comply with new or revised financial accounting standards until private

 

companies are required to comply and we have not opted out of this

extended transition period. When a standard is issued or revised and it has different application dates

 

for public or private companies, we can

adopt the new or revised standard at the time private companies adopt the

 

new or revised standard. This may make comparison of our

financial statements with another public company which is neither an emerging

 

growth company nor an emerging growth company which

has opted out of the extended transition period difficult or impossible because of

 

the potential differences in accounting standards used. If

some investors find our shares less attractive as a result of our reliance on

 

these exemptions, the trading prices of our shares may be lower

than they otherwise would be.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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29

ITEM 1B.

 

UNRESOLVED

 

STAFF COMMENTS

None.

 

ITEM 2.

 

PROPERTIES

Our headquarters is located at 11440 Tomahawk Creek Parkway, Leawood, Kansas.

 

Including our headquarters building, we operate

12 full-service banking centers located in: Leawood, Kansas; Wichita, Kansas; Kansas City,

 

Missouri; Oklahoma City, Oklahoma; Tulsa,

Oklahoma; Dallas, Texas; Frisco, Texas; Phoenix, Arizona; Denver, Colorado; Colorado Springs, Colorado; and Clayton, New Mexico. We

own our headquarters building, our banking centers in Leawood, Kansas, Wichita, Kansas, Oklahoma

 

City, Oklahoma and Clayton, New

Mexico and we lease the remainder of our locations. In addition, the

 

Company signed a second lease agreement in Dallas, Texas and a new

lease in Fort Worth, Texas.

 

We anticipate these additional locations will be open to our clients in 202

 

3. We believe that the leases to which we

are subject are generally on terms consistent with prevailing market terms. We also believe that

 

our facilities are in good condition and are

adequate to meet our operating needs for the foreseeable future.

 

ITEM 3.

 

LEGAL PROCEEDINGS

In the normal course of business, we are named or threatened to be named

 

as defendant in various lawsuits. Management, following

consultation with legal counsel, does not expect the ultimate disposition of

 

any one matter or a combination of these matters to have a

material adverse effect on our business, financial condition, results of operations,

 

cash flows or growth prospects. However, given the nature,

scope and complexity of the extensive legal and regulatory landscape applicable

 

to our business (including laws and regulations governing

consumer protection, fair lending, fair labor, privacy, information security and

 

anti-money laundering and anti-terrorism laws), we, like all

banking organizations, are subject to heightened legal and regulatory

 

compliance

 

and litigation risk.

 

ITEM 4.

 

MINE SAFETY DISCLOSURES

Not applicable.

 

INFORMATION ABOUT

 

OUR EXECUTIVE OFFICERS

The following table sets forth certain information regarding our executive

 

officers and the executive officers of the Bank, including

their names, ages and positions:

Name

Age as of March 3, 2023

Position(s)

Michael J. Maddox

53

President and Chief Executive Officer of the Company and

Chief Executive Officer of the Bank

W. Randall Rapp

58

President of the Bank

Benjamin R. Clouse

49

Chief Financial Officer of the Company and the Bank

Amy Fauss

56

Chief Human Resources Officer of the Company and the Bank

Steve Peterson

58

Chief Banking Officer of the Company and the Bank

Jana Merfen

41

Chief Technology Officer of the Company and the Bank

Amy Abrams

40

General Counsel and Corporate Secretary of the Company and

the Bank

Michael J. Maddox

—Mr. Maddox has served as President and Chief Executive Officer of the Company

 

since June 1, 2020, and as

Chief Executive Officer of the Bank since November 28, 2008. He

 

also served as President of the Bank from November 2008 until June

2022, when the roles of Chief Executive Officer and President of

 

the Bank were split. Prior to joining the Bank, he was a Regional President

for Intrust Bank. In this role, he managed Intrust Bank’s operations in Northeast

 

Kansas. Mr. Maddox has over 20 years of banking

experience. Mr. Maddox attended the University of Kansas from which he

 

received a Business degree and a law degree. While at KU, Mr.

Maddox was a four-year basketball letterman and a member of the

 

KU team that won the National Championship in 1988. Mr. Maddox

completed the Graduate School of Banking at the University of Wisconsin - Madison

 

in 2003. Mr. Maddox is a member of the Economic

Development Board of Johnson County and serves on the Kansas City Civic Council.

 

He has served on the board of CrossFirst Bank since

2008 and currently serves as Chairman of the Board of CrossFirst Bank.

W. Randall Rapp

—Mr. Rapp was appointed President of the Bank effective July 1, 2022. He

 

served as the Chief Risk and Credit

Officer for the Bank from April 2021 until July 2022, and Chief Credit Officer

 

of the Bank from April 2019 until April 2021. Prior to joining

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30

the Bank, Mr. Rapp held various positions at Texas Capital Bank, N.A. from March 2000 until

 

March 2019, including serving as Executive

Vice President and Chief Credit Officer from May 2015 until March 2019,

 

and as a Senior Credit Officer from 2013 until May 2015. He has

more than three decades of commercial banking experience, most of which

 

has been spent in credit management for private and public banks

in the Dallas/Fort Worth

 

metroplex. He earned a BBA in Accounting from The University of Texas

 

at Austin and an MBA in Finance from

Texas Christian University.

 

He is also a licensed CPA.

 

Mr. Rapp is a member

 

of the CrossFirst Bank Board of Directors.

Benjamin R. Clouse

—Mr. Clouse has served

 

as Chief Financial Officer of the Company since July 2021, leading the financial

organization and overall long-range financial planning

 

and reporting of the Company and the Bank, as well as supporting the execution of

the Bank's growth strategy.

 

He also serves as Chief Financial Officer and Cashier of the Bank. Prior to

 

joining CrossFirst, Mr. Clouse served

as Chief Financial Officer of Waddell

 

& Reed Financial, Inc., a financial services firm, from 2018 until its acquisition

 

in 2021. Mr. Clouse

 

held a variety of other senior leadership roles at Waddell

 

& Reed between March 2016 and February 2018, including Vice

 

President and

Chief Accounting Officer,

 

Vice President and Principal Accounting

 

Officer and Vice

 

President.

 

Prior to joining Waddell & Reed,

 

Mr.

Clouse served as Chief Financial Officer of Executive

 

AirShare Corporation, a private aviation company,

 

from September 2012 to October

2015. From 2006 to 2012 and from 2002 to 2005, he served in various

 

roles with H&R Block, Inc., a tax preparation company in Kansas

City, Missouri, including

 

Assistant Vice President—Audit Services

 

and Assistant Vice President and

 

Controller—Tax Services. From

 

2005

to 2006, Mr. Clouse served as Vice

 

President—Finance and Corporate Controller of Gold Bank Corporation,

 

Inc., a bank holding company.

From September 1996 to January 2002, he served in various roles in the audit practice

 

of Deloitte. Mr. Clouse obtained a business

 

degree and

a Master of Accountancy degree from Kansas State University.

Amy Fauss

—Ms. Fauss has served as Chief Human Resources Officer of

 

the Company and the Bank since January 2021 and

previously served as the Chief Operating Officer of the Bank from December

 

2009 until June 2022. Prior to joining CrossFirst, she served as

Executive Vice President

 

and Chief Operating Officer of Solutions Bank, where she directed all aspects of

 

daily operations and human

resources. Her experience also includes senior management positions

 

at Hillcrest Bank and Citizens-Jackson County Bank. Ms. Fauss holds a

Bachelor of Science degree in Finance from Central Missouri State University and

 

an MBA from University of Missouri – Kansas City.

 

She

has also completed the Graduate School of Banking at the University of

 

Wisconsin – Madison.

Steve Peterson—

Mr. Peterson has served as Chief Banking Officer since July 2020.

 

Prior to this role, Mr. Peterson served as the

Wichita Bank President for CrossFirst Bank from August 2011 until his appointment to Chief Banking Officer. Prior

 

to joining CrossFirst

Bank, Mr. Peterson served as Division President of Stillwater National Bank

 

from 2004 to August 2011, where he expanded the bank into

new two new major markets in Texas. From 2002 to 2004, Mr. Peterson was the City President at Compass Bank.

 

He served in roles of both

Vice President of Commercial Banking as well as Community Bank President for Commerce

 

Bank from 1998-2002. He spent several years

as an entrepreneur, owning and operating several restaurant franchise units

 

from 1991-1998.

 

From 1987 to 1991, he severed in several roles

at Bank IV, including Commercial Business Development. Mr. Peterson

 

received his Bachelor of Science degree in Business Administration

from the University of Kansas.

Jana Merfen

—Ms. Merfen joined CrossFirst in January 2021

 

as Chief Technology Officer. Prior to that she served as Chief

Information Officer of Dickinson Financial Corp. and Academy Bank from April 2017 to January 2021. Prior to working at Dickinson

Financial Corp. and Academy Bank, she worked at CommunityAmerica Credit Union where she was the Director

 

of Information Systems &

Enterprise Project Manager Officer from July 2016 to April 2017 and was the Director of Enterprise Risk Management

 

and Business Process

Operations from September 2014 to July 2016. Ms. Merfen has a degree

 

in accounting from Miami University in Ohio.

 

Amy Abrams

 

– Ms. Abrams was appointed General Counsel and Corporate Secretary of the Company and the Bank in June 2022.

 

As

General Counsel and Corporate Secretary, Ms. Abrams is responsible for the oversight of CrossFirst’s legal affairs and

 

corporate governance

matters.

 

Prior to joining the Company and the Bank, Ms. Abrams provided legal assistance to Cerner Corporation and its global affiliates

(“Cerner”) from October 2011 until May 2022, most recently serving

 

as Lead Counsel – SEC & Corporate and Assistant Secretary. Cerner

(recently acquired by Oracle Corporation) was a supplier of healthcare

 

information technology services, devices, and hardware. Prior to

Cerner, Ms. Abrams was an attorney at the law firm of Polsinelli P.C. Ms. Abrams earned her Juris Doctorate

 

degree from Loyola University-

Chicago School of Law and has a business degree from the University of

 

Kansas.

Part II

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED

STOCKHOLDER MATTERS

 

AND ISSUER PURCHASES OF EQUITY

 

SECURITIES

Our common stock is traded on the Nasdaq Global Select Market under the

 

symbol “CFB.” We had 374 holders of record at

February 23, 2023.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

31

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

Total Return Performance

CrossFirst Bankshares, Inc.

Russell 2000 Index

KBW Nasdaq Regional Banking Index

Performance Graph

The following table and graph sets forth the cumulative total stockholder return for

 

the Company’s common stock from August 15,

2019 (the date that our common stock commenced trading on the Nasdaq

 

Global Select Market) through December 30, 2022 (the last trading

day of the year), compared to an overall stock market index (Russell 2000 Index)

 

and one peer group index (KBW Nasdaq Regional Banking

Index) for the same period. The indices are based on total returns assuming reinvestment

 

of dividends. The graph assumes an investment of

$100 on August 15, 2019. The performance graph represents past performance

 

and should not be considered to be an indication of future

performance.

The performance graph and related text are being furnished to and not filed

 

with the SEC, and will not be deemed “soliciting

material” or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be

deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically

incorporate such information by reference into such a filing.

8/15/2019

12/31/2019

12/31/2020

12/31/2021

12/30/2022

CrossFirst Bankshares, Inc.

$

100.00

$

99.45

$

73.63

$

106.92

$

85.00

Russell 2000 Index

$

100.00

$

114.85

$

137.77

$

158.19

$

125.86

KBW Nasdaq Regional Banking Index

$

100.00

$

116.94

$

102.79

$

136.92

$

123.98

Dividends

Historically, CrossFirst has not declared or paid any dividends on its common

 

stock. Payments of future dividends, if any, will be at

the discretion of our Board of Directors and will depend upon our results of operations,

 

our financial condition, capital requirements, general

economic conditions, regulatory and contractual restrictions, our

 

business strategy, our ability to service any equity or debt obligations

 

senior

to our common stock and other factors that our Board of Directors deems relevant. We are not obligated

 

to pay dividends on our common

stock and are subject to restrictions on paying dividends on our common stock.

Our principal source of funds to pay dividends on our common stock would

 

be dividends received from our wholly-owned

subsidiaries. Furthermore, our wholly-owned subsidiaries are not obligated

 

to pay dividends to us, and any dividends paid to us would

depend on the earnings or financial condition of our wholly-owned

 

subsidiaries and various business considerations. As is the case with all

financial institutions, the profitability of our wholly-owned subsidiaries

 

is subject to the fluctuating cost and availability of money, changes

in interest

 

rates and economic conditions in general. In addition, various federal

 

and state statutes limit the amount of dividends that our

wholly-owned subsidiaries may pay to the Company without regulatory approval.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

32

Share Repurchase Program

The following table summarizes our repurchases of our common shares

 

for the three months ended December 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

October 1 - 31

177,712

$

13.46

177,712

$

18,280,265

November 1 - 30

39,824

$

13.72

39,824

$

17,733,858

December 1 - 31

140,110

$

13.28

140,110

$

15,872,867

Total

357,646

$

13.42

357,646

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. This program was completed

 

during the third quarter of 2022.

 

On May 10,

2022, the Company announced that its Board of Directors approved

 

a second share repurchase program under which the Company may

repurchase up to $30 million of its common stock. As of December 31, 2022, approximately $16 million remains

 

available for repurchase

under this share repurchase program. 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.

See Part III, Item 12 for information relating to securities authorized for

 

issuance under our equity compensation plans.

ITEM 6.

 

[RESERVED]

 

ITEM 7.

 

MANAGEMENT’S DISCUSSION

 

AND ANALYSIS

 

OF FINANCIAL

CONDITION AND

 

RESULTS OF OPERATIONS

Overview

This section includes a discussion of the financial condition and results of operations

 

of CrossFirst Bankshares, Inc. and its

subsidiaries. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations

in our 2021 Form 10-K filed

with the SEC on February 28, 2022 for a discussion of the financial condition and results

 

of operations of the Company for the period ended

December 31, 2020 and a comparison between the 2021 and 2020 results.

 

Tables may include additional periods to comply with disclosure

 

requirements or to illustrate trends in greater depth. You should read

the following financial data in conjunction with the other information contained

 

in this 10-K, including under “Part I, Item 1A. Risk Factors,”

and in the financial statements and related notes included elsewhere

 

in this 10-K.

 

Growth History

We have grown organically primarily by establishing our branch

 

light network in seven states, attracting new clients and expanding

our relationships with existing clients, as well as through three strategic acquisitions. The

 

data below presents the business' growth in key

areas for the past five years and the related compound annual growth rate (“CAGR”):

2018 to 2022

As of December 31,

CAGR

2022

2021

2020

2019

2018

(Dollars in thousands)

Available-for-sale ("AFS") securities

1

%

$

686,901

$

745,969

$

654,588

$

739,473

$

661,628

Gross loans (net of unearned income)

(1)

15

5,372,729

4,256,213

4,441,897

3,852,244

3,060,747

Total assets

13

6,601,086

5,621,457

5,659,303

4,931,233

4,107,214

Non-interest-bearing deposits

30

1,400,260

1,163,224

718,459

521,826

484,284

Total deposits

15

%

$

5,651,308

$

4,683,597

$

4,694,740

$

3,923,759

$

3,208,097

(1)

 

Includes $3 million, $65 million and $292 million of PPP loans at December 31, 2022, 2021 and 2020, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

33

Performance Measures

 

As of or for the Year Ended December 31,

2022

2021

2020

(Dollars in thousands, except per share data)

Return on average assets

1.07

%

1.24

%

0.24

%

Adjusted return on average assets

(1)

1.19

%

1.31

%

0.37

%

Return on average common equity

9.97

%

10.84

%

2.05

%

Adjusted return on average common equity

(1)

11.11

%

11.40

%

3.26

%

Earnings per share

$

1.24

$

1.35

$

0.24

Diluted earnings per share

$

1.23

$

1.33

$

0.24

Adjusted diluted earnings per share

(1)

$

1.37

$

1.40

$

0.38

Efficiency ratio

(2)

57.75

%

54.50

%

58.13

%

Adjusted efficiency ratio - FTE

(1)(2)(3)

54.43

%

52.02

%

52.98

%

Ratio of equity to assets

9.22

%

11.88

%

11.03

%

(1)

 

Represents a non-GAAP financial measure.

 

See "Non-GAAP Financial Measures" in Management Discussion and Analysis for a reconciliation of

these measures.

(2)

We calculate efficiency ratio as non-interest expense divided by the sum of net interest income and non-interest income.

(3)

Tax exempt income (tax-free municipal securities) is calculated on a tax equivalent basis.

 

The incremental tax rate used is 21.0%.

2022 Highlights:

●

Completed the acquisition of Farmers & Stockmens Bank (“Central”) adding

 

liquidity, new production talent, and expanding

into attractive and growing markets

o

Added $389 million of loans and $570 million of deposits

●

Total assets were $6.6 billion primarily made up of $5.4 billion in loans and

 

$687 million in securities

●

Loans grew $1.1 billion for the year or 26%; excluding the Central acquisition,

 

loans grew 17% for the year

●

Deposits grew $968 million for the year or 21%; excluding the Central acquisition,

 

deposits grew 9% for the year

●

Credit quality improved meaningfully with the non-performing assets to total

 

assets ratio at 0.20% at year end and full year net

charge offs of just 0.08%

●

Purchased 2,448,428 or $36 million of outstanding shares as part of

 

the share repurchase programs in 2022 representing 5% of

outstanding shares

●

Launched a new digital banking platform, providing enhanced online

 

tools and resources for clients

●

Book value per share decreased to $12.56 compared to $13.23 in the prior year. Tangible

 

book value per share

(1)

 

decreased to

$11.96 compared to $13.23 in the prior year as earnings were more than offset

 

by an increase in the unrealized losses on our

investment portfolio, the impact of Central and a reduction due to share repurchases

(1)

 

Represents a non-GAAP financial measure.

 

See “Non-GAAP Financial Measures” in Management Discussion and Analysis for a

reconciliation of these measures.

Update to Net Interest Margin Methodology

The Company modified the yield calculation on the AFS security portfolio to better conform to peer disclosures in the

 

first quarter

of 2022. All earning-asset yields and net interest margins presented were retroactively updated for the change in methodology. The

 

following

changes were made:

●

The average unrealized gain (loss) on AFS securities balance was removed from the security lines and placed in other non-

interest earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

34

●

The annualization method was changed from Actual/Actual to 30/360 for the security yields

The Company believes the new calculation provides better insight into

 

why the security yields and net interest margin changed

period-to-period.

 

For the Year Ended December 31,

2021

2020

Previous calculation

Yield on securities - taxable

1.93

 

%

 

2.26

 

%

 

Yield on securities - tax-exempt

(1)

3.28

3.52

Yield on interest-earning assets

(1)

3.60

3.96

Net interest spread

(1)

3.10

3.04

Net interest margin

(1)

3.15

3.13

As calculated going forward

Yield on securities - taxable

1.96

2.32

Yield on securities - tax-exempt

(1)

3.48

3.74

Yield on interest-earning assets

(1)

3.62

3.98

Net interest spread

(1)

3.12

3.06

Net interest margin

(1)

3.17

3.15

Change

Yield on securities - taxable

0.03

0.06

Yield on securities - tax-exempt

(1)

0.20

0.22

Yield on interest-earning assets

(1)

0.02

0.02

Net interest spread

(1)

0.02

0.02

Net interest margin

(1)

0.02

 

%

 

0.02

 

%

 

(1)

Tax-exempt income is calculated on a tax-equivalent basis. Tax-free municipal securities

 

are exempt from Federal taxes. The incremental

tax rate used is 21%.

Concentrations

As of December 31, 2022, the Company’s top 25 largest borrowing relationships

 

totaled approximately $1.9 billion in total

commitments,

 

representing, in the aggregate, 24% of our total outstanding commitments. As of December 31, 2022, the Company’s top

 

25

deposit relationships

 

represented approximately 25%, or $1.4 billion, of total deposits. The majority

 

of the $1.4 billion are money market

deposit accounts. The Company believes that there are sufficient funding sources, including

 

on-balance sheet liquid assets and wholesale

deposit options, so that an immediate reduction in these deposit balances would

 

not be expected to have a detrimental effect on the

Company’s financial position or operations.

 

For the year ended December 31, 2021, a significant portion of the

 

Company’s ATM and credit card interchange income was driven by

companies that mobilized their workforce directly impacted by the

 

COVID-19 pandemic. These companies represented $5 million or 61% of

the $8 million in ATM and credit card interchange income. This activity did not re-occur in 2022 at the same level.

Discussion and Analysis - Results

 

of Operations

Net Interest Income

Our profitability depends in substantial part on our net interest income.

 

Net interest income is the difference between the amounts

received on our interest-earning assets and the interest paid on our interest-bearing

 

liabilities. Net interest income is impacted by internal and

external factors including:

•

 

Changes in the volume, rate, and mix of interest-earning assets and interest-bearing

 

liabilities;

•

 

Changes in competition, federal economic, monetary and fiscal policies and

 

economic conditions; and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

35

•

 

Changes in credit quality.

We present and discuss net interest income on a fully tax-equivalent basis (“FTE”).

 

For the fiscal year ended December 31, 2022, we operated in an increasing

 

interest rate environment.

 

Our earning assets repriced

quicker than our cost of funds, resulting in a higher net interest margin in 2022.

 

During 2022, the Company benefited from changes in our

deposit mix, including an increase in non-interest-bearing deposits that helped

 

manage cost of funds.

The following table presents, for the periods indicated, average statement

 

of financial condition information, interest income, interest

expense and the corresponding average yield earned and rates paid:

For the Years

 

Ended December 31,

2022

2021

2020

Average

Balance

Interest

Income /

Expense

Yield / Rate

(4)

Average

Balance

Interest

Income /

Expense

Yield / Rate

(4)

Average

Balance

Interest

Income /

Expense

Yield / Rate

(4)

(Dollars in thousands)

Interest-earning assets:

Securities - taxable

$

220,760

$

5,286

2.39

%

$

201,419

$

3,955

1.96

%

$

261,059

$

6,058

2.32

%

Securities - tax-exempt - FTE

(1)

551,734

18,559

3.36

488,544

16,981

3.48

421,548

15,745

3.74

Federal funds sold

3,139

49

1.56

-

-

—

1,020

18

1.73

Interest-bearing deposits in other banks

239,240

3,702

1.55

389,893

502

0.13

179,978

621

0.35

Gross loans, net of unearned income

(2)(3)

4,603,697

224,138

4.87

4,340,791

174,660

4.02

4,310,345

183,738

4.26

Total interest-earning assets

 

- FTE

(1)

5,618,570

$

251,734

4.48

%

5,420,647

$

196,098

3.62

%

5,173,950

$

206,180

3.98

%

Allowance for loan losses

(57,388)

(73,544)

(68,897)

Other non-interest-earning assets

198,849

 

 

244,368

 

 

253,426

 

 

Total assets

$

5,760,031

$

5,591,471

$

5,358,479

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

Transaction deposits

$

538,604

$

4,951

0.92

%

$

608,063

$

1,152

0.19

%

$

447,777

$

1,696

0.38

%

Savings and money market deposits

2,475,891

33,599

1.36

2,338,315

8,225

0.35

1,993,964

14,033

0.70

Time deposits

688,095

11,432

1.66

812,774

9,146

1.13

1,155,492

20,856

1.80

Total interest-bearing deposits

3,702,590

49,982

1.35

3,759,152

18,523

0.49

3,597,233

36,585

1.02

FHLB and short-term borrowings

232,018

4,855

2.09

279,379

5,840

2.09

417,956

6,508

1.56

Trust preferred securities, net of fair value

adjustments

1,072

142

13.25

982

96

9.76

939

106

11.34

Non-interest-bearing deposits

1,146,594

—

—

876,309

—

—

684,294

—

—

Cost of funds

5,082,274

$

54,979

1.08

%

4,915,822

$

24,459

0.50

%

4,700,422

$

43,199

0.92

%

Other liabilities

60,175

35,447

43,331

Stockholders’ equity

617,582

 

 

640,202

 

 

614,726

 

 

Total liabilities and stockholders’

 

equity

$

5,760,031

$

5,591,471

$

5,358,479

Net interest income - FTE

(1)

$

196,755

 

$

171,639

 

$

162,981

 

Net interest spread - FTE

(1)

3.40

%

3.12

%

3.06

%

Net interest margin -FTE

(1)

3.50

%

3.17

%

3.15

%

(1)

Calculated on a fully tax-equivalent basis. Tax

 

-free municipal securities are exempt from Federal taxes. The incremental

 

tax rate used is 21%.

(2)

Loans, net of unearned income includes non-accrual loans of $11

 

million, $31 million and $75 million as of December 31,

 

2022, 2021 and 2020, respectively.

(3)

 

Loan interest income includes loan fees of $14 million, $18 million

 

and $14 million for the years ended December 31, 2022,

 

2021 and 2020, respectively.

(4)

Actual unrounded values are used to calculate the reported yield or rate

 

disclosed. Accordingly, recalculations

 

using the amounts in thousands as disclosed in this report may

 

not produce the same

amounts.

Interest Income -

Interest income increased for the year ended December 31, 2022 compared to the same period

 

in 2021. The yield on

earning assets increased 86 basis points, led by an 85 basis point increase in

 

loan yields driven by the repricing of existing loans, origination

of new loans and the Central acquisition. The yield on the investment portfolio also increased

 

five basis points.

 

Average earning assets

increased

 

$197.9 million due to $262.9 million higher average loans and an $82.5 million increase in

 

the average investment portfolio. The

increased loan balances were due to strong loan growth, both organically

 

and due to the acquisition of Central.

Interest Expense -

Interest expense increased for the year ended December 31, 2022, compared

 

to the same period in 2021. The cost of

interest-bearing deposits increased due to the higher interest rate environment

 

and increased competition for deposits. The average volume

for interest-bearing deposits declined primarily because of decreases in time

 

deposits

 

and transaction deposits, partially offset by increases in

savings and money market deposits. Average FHLB and other borrowings declined compared to 2021; however,

 

the rate paid on these

borrowings remained consistent year over year.

 

The cost of funds increase was partially offset by an increase in average non-interest-bearing

deposits from 2021 to 2022. We currently anticipate our cost of funds will increase in 2023

 

due to continued increases in the interest rate

environment and competition for deposits.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

36

36%

38%

9%

1%

(1%)

17%

34%

59%

25%

7%

(46%)

21%

Service charges & fees

ATM & credit card

Bank-owned life

insurance ("BOLI")

AFS gain on sale

Gains (losses) on

equity securities

Other

Breakout of Non-interest Income

2022

2021

Net Interest Income –

Full year 2022 net interest income grew $24.8 million, an increase of 15% compared

 

to 2021.

 

Full year net interest

income - FTE grew $25.1 million, an increase of 15% compared to 2021, while

 

the net interest margin (“NIM”) - FTE increased to 3.50%

from 3.17% in the prior year due to the higher interest rate environment as well as the mix shift

 

from cash into higher earning assets as noted

above.

 

The NIM – FTE also benefited from a 31% increase in non-interest-bearing

 

deposits which benefited the NIM-FTE 4 basis points. We

currently expect the net interest margin to remain flat or slightly increase in

 

2023 as we currently anticipate a slowdown in the trajectory of

interest rate increases. We currently anticipate that competition for deposits will continue

 

into 2023 as clients seek higher yields.

Non-interest Income

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

 

shown:

For the Year Ended December 31,

Change

2022

2021

$

%

(Dollars in thousands)

Service charges and fees on customer accounts

$

6,228

$

4,580

$

1,648

36

%

Realized gains on available-for-sale securities

96

1,023

(927)

(91)

Gain on sale of loans

47

-

47

—

Gains (losses), net on equity securities

(181)

(6,325)

6,144

(97)

Income from bank-owned life insurance

1,602

3,483

(1,881)

(54)

Swap fees and credit valuation adjustments, net

188

275

(87)

(32)

ATM and credit card interchange income

6,523

7,996

(1,473)

(18)

Other non-interest income

2,778

2,628

150

6

Total non-interest income

$

17,281

$

13,660

$

3,621

27

%

Non-interest income to average assets

0.30

%

0.24

%

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

Service charges and fees on customer accounts -

This category includes account analysis fees offset by a customer

 

rebate program. The

increase for the year ended December 31, 2022 compared to 2021

 

was driven by a decline in costs associated with our rebate program. In

addition, customer growth and an increase in outstanding balances improved

 

account analysis fees.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

37

62%

9%

3%

4%

4%

18%

61%

10%

4%

4%

4%

17%

Salary & benefits

Occupancy

Deposit insurance

Professional fees

Software &

communication

Other

Breakout of Non-interest Expense

2022

2021

Realized gains on available-for-sale securities –

 

The Company sells AFS securities for strategic reasons including capitalizing on attractive

market conditions, improving the credit quality of the security portfolio, or

 

for tax purposes,

 

primarily to offset capital losses. The realized

gains on AFS securities declined from 2021 to 2022

 

primarily due to the Company selling securities for tax purposes and to capitalize on

attractive market conditions in 2021.

Gains (losses), net on equity securities –

During 2021, the Company recorded a $6 million loss related to an

 

equity investment received as

part of a modified loan agreement in 2020. The Company elected to account for this security at

 

cost less impairment, unless an orderly

transaction for an identical or similar investment of the same issuer occurred that

 

would result in an updated fair market value. During 2021,

significant adverse changes in market conditions for the investment resulted in

 

the investment being sold below its book value. Refer to the

“Equity Securities” section in

Note 3: Securities

 

within the Notes to the Consolidated Financial Statements for additional information.

Income from bank-owned life insurance –

The decrease for the year ended December 31, 2022 compared

 

to 2021 was due to the Company

recognizing $2 million in tax-free death benefits from a bank-owned life insurance policy

 

in 2021 that did not re-occur in 2022.

ATM and credit card interchange income -

The decrease in ATM and credit card interchange income for the year ended December 31,

2022 compared to 2021 was primarily the result of one large customer that mobilized

 

their workforce directly impacted by the COVID-19

pandemic during 2020 and into 2021.

 

This activity did not re-occur in 2022 and accounts for the lower income.

Non-interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

38

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

For the Year Ended December 31,

Change

2022

2021

$

%

(Dollars in thousands)

Salary and employee benefits

$

75,288

$

61,080

$

14,208

23

%

Occupancy

10,663

9,688

975

10

Professional fees

5,275

3,519

1,756

50

Deposit insurance premiums

3,354

3,705

(351)

(9)

Data processing

4,750

2,878

1,872

65

Advertising

3,201

2,090

1,111

53

Software and communication

5,093

4,234

859

20

Foreclosed assets, net

(17)

697

(714)

(102)

Other non-interest expense

14,135

11,491

2,644

23

Total non-interest expense

$

121,742

$

99,382

$

22,360

22

%

Non-interest expense to average assets

2.11

%

1.78

%

Non-interest expense increased $22.4 million and included $4.2

 

million of transaction costs and core deposit intangible amortization

related to the Central acquisition. In addition, the Central acquisition added

 

approximately $1.7 million of non-interest expense, the majority

in the salary and employee benefits line as we added employees to our

 

teams.

 

The ratio of non-interest expense to average assets increased

to 2.11%, in part, due to the Central acquisition as well as increased costs as we continue

 

to invest in new markets, technology, and

personnel.

 

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

Salary and Employee Benefits -

Salary and employee benefit costs increased due to new market expansion, annual merit

 

increases, the

addition of employees as part of the Central acquisition and increased perform

 

ance-based incentive compensation.

Occupancy -

Occupancy costs increased due to the adoption of Accounting Standards Codification (“ASC”) 842,

 

Leases on January 1,

2022 as well as a new lease in our Dallas market resulting from expansion.

 

We currently expect occupancy costs to increase in 2023 related

to our expansion into the Fort Worth, TX market and may increase further as we enter new markets in the

 

future.

Professional Fees -

Professional fees increased due to $1.4 million related to the Central Bank acquisition,

 

$0.3 million in lending related

legal fees and $0.1 million due to recruiting fees.

Data Processing

–

Data processing expense increased due to the Central acquisition, account

 

growth and costs related to our digital

banking conversion.

Advertising

-

The increase in advertising costs was driven by increased post-pandemic activities.

Software and Communication -

The increase was driven by our continued investment in best-in-class technologies.

 

In addition to the

growing number of technologies implemented, a portion of the increase

 

in costs was due to our growth.

Foreclosed Assets, net -

The decrease in foreclosed assets, net was due to the Company selling a foreclosed commercial use

 

facility

during 2021 at a loss.

Other non-interest expense -

The increase was due to employee separation expense of $1.1 million and higher

 

travel and entertainment

costs in 2022 due to an increase in post-pandemic activities.

Our GAAP efficiency ratio for 2022 was 57.75% and our adjusted efficiency ratio – FTE was 54.43%. See below

 

under “Non-

GAAP Financial Measures” for a reconciliation. We currently expect to manage the efficiency ratio lower through 2023 as we finish

 

the

integration of Central and scale investments in new markets.

Income Taxes

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, such as bank-owned life insurance

 

and tax-exempt municipal securities, state tax credits and permanent

tax differences from equity-based compensation. In addition, 2022

 

included a $0.3 million charge related to certain non-deductible

acquisition costs in connection with the Central acquisition. Detail behind

 

the differences between the statutory rate and effective tax rate for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

39

the years ended December 31, 2022, 2021 and 2020 is provided in

Note 12: Income Taxes

 

within the Notes to the Consolidated Financial

Statements.

 

The tax-exempt benefit diminishes as the Company’s ratio of taxable income

 

to tax-exempt income increases. We currently anticipate

the effective tax rate to remain in the range of 20% to 22% for 2023. A three-year trend of our income tax and effective tax rate is presented

below:

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Income tax expense

$

15,973

$

17,556

$

2,713

Income before income taxes

$

77,572

$

86,969

$

15,314

Effective tax rate

21

%

20

%

18

%

Non-GAAP Financial Measures

In addition to disclosing financial measures determined in accordance

 

with U.S. generally accepted accounting principles (GAAP), the

Company discloses certain non-GAAP financial measures including “tangible common

 

stockholders’ equity,” “tangible book value per

share,” “adjusted efficiency ratio – FTE,” “adjusted net income,” “adjusted

 

diluted earnings per share,” “adjusted return on average assets,”

and “adjusted return on average common equity.”

 

We consider the use of select non-GAAP financial measures and ratios to be useful for

financial and operational decision making and useful in evaluating period-to-period

 

comparisons. We believe that these non-GAAP financial

measures provide meaningful supplemental information

 

to investors regarding our performance by excluding certain expenditures or gains

that we believe are not indicative of our primary business operating results. We believe that management

 

and investors benefit from referring

to these non-GAAP financial measures in assessing our performance and when planning,

 

forecasting, analyzing and comparing past, present

and future periods.

These non-GAAP financial measures should not be considered a substitute for financial information presented

 

in accordance with

GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures

we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by

providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation

 

of the

impact of the components adjusted for in the non-GAAP financial measure so that both measures and the

 

individual components may be

considered when analyzing our performance.

A reconciliation of non-GAAP financial measures to the comparable GAAP financial measures follows.

For the Year Ended

12/31/2022

12/31/2021

12/31/2020

(Dollars in thousands, except per share data)

Adjusted net income:

Net income

$

61,599

$

69,413

$

12,601

Add: Acquisition costs

3,890

-

-

Add: Acquisition - Day 1 CECL provision

4,400

-

-

Add: Employee separation

1,063

-

-

Add: Unrealized loss on equity security

-

6,200

-

Add: Accelerated employee benefits

-

719

-

Less: BOLI settlement benefits

(1)

-

(1,841)

-

Add: Goodwill impairment

(1)

-

-

7,397

Less: Tax effect

(2)

(2,335)

(1,512)

-

Adjusted net income

$

68,617

$

72,979

$

19,998

Diluted weighted average common shares outstanding

50,002,054

52,030,582

52,548,547

Diluted earnings per share

$

1.23

$

1.33

$

0.24

Adjusted diluted earnings per share

$

1.37

$

1.40

$

0.38

(1)

No tax effect.

(2)

Represents the tax impact of the adjustments at a tax rate of 21.0%, plus permanent

 

tax expense associated with merger related

transactions and permanent tax benefit associated with stock-based

 

grants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

40

For the Year Ended

12/31/2022

12/31/2021

12/31/2020

(Dollars in thousands)

Adjusted return on average assets:

Net income

$

61,599

$

69,413

$

12,601

Adjusted net income

68,617

72,979

19,998

Average assets

$

5,760,031

$

5,591,471

$

5,358,479

Return on average assets

1.07

%

1.24

%

0.24

%

Adjusted return on average assets

1.19

%

1.31

%

0.37

%

For the Year Ended

12/31/2022

12/31/2021

12/31/2020

(Dollars in thousands)

Adjusted return on common equity:

Net income

$

61,599

$

69,413

$

12,601

Adjusted net income

68,617

72,979

19,998

Average common equity

$

617,582

$

640,202

$

614,276

Return on average common equity

9.97

%

10.84

%

2.05

%

Adjusted return on average common equity

11.11

%

11.40

%

3.26

%

For the Year Ended

12/31/2022

12/31/2021

12/31/2020

(Dollars in thousands, except per share data)

Tangible common stockholders' equity:

Total stockholders' equity

$

608,599

$

667,573

$

624,428

Less: goodwill and other intangible assets

29,081

130

208

Tangible common stockholders' equity

$

579,518

$

667,443

$

624,220

Tangible book value per share:

Tangible common stockholders' equity

$

579,518

$

667,443

$

624,220

Shares outstanding at end of period

48,448,215

50,450,045

51,679,516

Book value per share

$

12.56

$

13.23

$

12.08

Tangible book value per share

$

11.96

$

13.23

$

12.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

41

For the Year Ended

12/31/2022

12/31/2021

12/31/2020

(Dollars in thousands)

Adjusted Efficiency Ratio - FTE

(1)

Non-interest expense

$

121,742

$

99,382

$

99,968

Less: Acquisition costs

(3,890)

-

-

Less: Core deposit intangible amortization

(291)

-

-

Less: Employee separation

(1,063)

-

-

Less: Accelerated employee benefits

-

(719)

-

Less: Goodwill impairment

-

-

(7,397)

Adjusted Non-interest expense (numerator)

$

116,498

$

98,663

$

92,571

Net interest income

193,534

168,691

160,249

Tax equivalent interest income

(1)

3,221

2,948

2,732

Non-interest income

17,281

13,660

11,733

Add: Unrealized loss on equity security

-

6,200

-

Less: BOLI settlement benefits

-

(1,841)

-

Total tax-equivalent income (denominator)

$

214,036

$

189,658

$

174,714

Efficiency Ratio

57.75

%

54.50

%

58.13

%

Adjusted Efficiency Ratio - FTE

(1)

54.43

%

52.02

%

52.98

%

(1)

Tax exempt income (tax-free municipal securities) is calculated on a tax equivalent

 

basis. The incremental tax rate used is 21.0%.

Discussion and Analysis - Financial

 

Condition

Loan Portfolio

At December 31, 2022, our loan portfolio was comprised of new loans

 

that we have originated and loans that were acquired on

November 22, 2022 in the acquisition of Central.

 

Certain of the comparative graphs below are excluding the Central loans and

 

are so noted.

Loans represent our largest portion of earning assets and typically provide higher

 

yields than other assets. The quality and

diversification of the loan portfolio is an important consideration when

 

reviewing our financial condition. We established an internal loan

policy that outlines a standard lending philosophy and provides consistent direction

 

to achieve goals and objectives, which include

maximizing earnings over the short and long term by managing risks through

 

the policy. Internal concentration limits exist on all loans,

including commercial real estate, energy, and land development. We established strong

 

underwriting practices and procedures to assess our

borrowers, including review of debt service, collateral value and evaluation

 

of guarantors. We also engage third-parties to independently

review our loan portfolio. Appropriate actions are taken when a borrower is no longer able to service its debt.

Our loan portfolio consists of various types of loans, primarily made up of commercial

 

and industrial and commercial real estate loans.

Commercial and industrial loans are generally paid back through normal business

 

operations. Commercial real estate loans, which include

both construction and limited term financing are typically paid back through

 

normal income from operations, the sale of the underlying

property or refinancing by other institutional sources. Most of our loans are made

 

to borrowers within the states we operate, which include

Kansas, Missouri, Oklahoma, Arizona, Texas, Colorado and New Mexico. In addition, we occasionally invest

 

in syndicated shared national

credits and loan participations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

42

16%

8%

15%

10%

8%

3%

8%

6%

5%

21%

16%

11%

11%

9%

9%

4%

5%

6%

6%

23%

Commercial and Industrial Loan Portfolio by Industry

12/31/2022

12/31/2021

The following table presents the balance and associated percentage of

 

each major product type within our portfolio as of the dates

indicated:

As of

 

December 31, 2022

As of

 

December 31, 2021

December 31, 2021 vs.

December 31, 2022

 

% Change

(Dollars in thousands)

Commercial and industrial

(1)

$

1,017,678

$

843,024

20.7

%

Commercial and industrial lines of credit

957,254

617,398

55.0

Energy

173,218

278,579

(37.8)

Commercial real estate

1,718,947

1,278,479

34.5

Construction and land development

794,788

574,852

38.3

Residential real estate

409,124

360,046

13.6

Multifamily real estate

237,984

240,230

(0.9)

Consumer

63,736

63,605

0.2

Total

$

5,372,729

$

4,256,213

26.2

%

(1) Total includes PPP loans of $3.2 million and $64.8 million as of December 31, 2022 and 2021, respectively

For a description of the Company’s loan segments refer to the “Loan Portfolio

 

Segments” section within

Note 4: Loans and Allowance

for Credit Losses

 

within the Notes to the Consolidated Financial Statements.

Commercial and Industrial Loans

The Company provides a mix of variable- and fixed-rate commercial

 

and industrial loans across various industries. We extend

commercial and industrial loans on an unsecured and secured basis. Unsecured

 

commercial and industrial loan balances totaled $271 million

or 5% of the total loan portfolio as of December 31, 2022 compared to $126 million or 3% as of

 

December 31, 2021.

 

Our commercial and industrial loan portfolio is comprised of diverse industry segments. A breakdown of the Company’s commercial

and industrial loan portfolio by industry, excluding the loans acquired from

 

Central, as of December 31, 2022 and 2021 is provided below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

43

16%

6%

6%

3%

6%

5%

2%

3%

5%

5%

5%

25%

13%

16%

5%

8%

3%

4%

6%

3%

2%

4%

4%

5%

25%

15%

Real Estate Loan Portfolio by Segment

12/31/2022

12/31/2021

29%

18%

13%

7%

6%

27%

30%

18%

16%

9%

3%

24%

TX

KS

OK

MO

AZ

Remaining

States

Real Estate Loan Portfolio by Geography

12/31/2022

12/31/2021

Real Estate Loans

Our real estate portfolio is comprised of construction and development loans,

 

residential family and multifamily loans and commercial

real estate loans. Our Real Estate portfolio,

 

excluding Central, is predominately in-market relationships with 73% of

 

Real Estate loans

located within our footprint of Kansas, Missouri, Texas, Oklahoma and Arizona as of December 31, 2022, based on the geographical

 

location

of the collateral.

 

A breakdown of our real estate portfolio by type and geography (based upon location of collateral), excluding the loans

acquired from Central, as of December 31, 2022 and 2021 is presented

 

below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

44

The following table shows the contractual maturities of our gross loans and

 

sensitivity to interest rate changes:

As of December 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 and industrial

$

89,571

$

116,378

$

308,284

$

341,195

$

46,807

$

93,496

$

19,589

$

2,358

$

1,017,678

Commercial and industrial lines of credit

47,360

388,302

21,288

464,461

16,101

19,742

-

-

957,254

Energy

-

29,159

916

143,143

-

-

-

-

173,218

Commercial real estate

64,215

221,690

477,324

452,410

179,940

262,030

8,846

52,492

1,718,947

Construction and land development

28,382

81,548

82,146

492,424

30,608

34,787

3,661

41,232

794,788

Residential real estate

4,380

2,630

21,987

4,846

68,818

5,856

377

300,230

409,124

Multifamily real estate

4,379

60,235

61,750

98,023

4,864

8,733

-

-

237,984

Consumer

3,449

12,356

8,669

12,656

371

24,612

-

1,623

63,736

Total

$

241,736

$

912,298

$

982,364

$

2,009,158

$

347,509

$

449,256

$

32,473

$

397,935

$

5,372,729

Provision and Allowance for Credit Losses (“ACL”)

The Company implemented the CECL model as of January 1, 2022. Refer

 

to

Note 1: Nature of Operations and Summary of

Significant Accounting Policies

 

and

Note 4: Loans and Allowance for Credit Losses

 

within the Notes to Consolidated Financial Statements

for details regarding the transition, including the impact to the financial statements.

 

The CECL model compared to the incurred loss model

may accelerate the provision for credit losses if the Company’s

 

loan portfolio continues to grow.

 

In addition, positive (negative) forward-

looking indicators may decrease (increase) the required provision for

 

credit losses.

The ACL at December 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.

For the Year Ended December 31,

2022

2021

2020

Asset quality

(Dollars in thousands)

Provision for credit losses

(1)

 

- loans

$

7,997

$

(4,000)

$

56,700

Provision for credit losses

(1)

 

- off-balance sheet

3,504

N/A

N/A

Allowance for credit losses

(2)

 

- loans

61,775

58,375

 

75,295

Allowance for credit losses

(2)

 

- off-balance sheet

8,688

N/A

N/A

Net charge-offs

$

3,765

$

12,920

$

38,301

(1)

Prior to 2022, this line represents the provision for loan losses

(2)

 

Prior to 2022, this line represents the allowance for loan and lease losses

Upon adoption of the CECL model, the Company established a reserve for unfunded commitments (“RUC”) and

 

reduced the ACL

$1.7 million as of January 1, 2022.

 

During 2022, the ACL increased by $3.4 million due to $4.6 million in Central Day 1 CECL provision

on non-PCD loans and a $0.9 million Central Day 1 provision on PCD loans.

 

In addition, the ACL grew $12.8 million due to loan growth

and changes in credit quality and economic factors.

 

These increases were partially offset by the day 1 impact of CECL adoption noted

above of $1.7 million, $3.8 million in net charge-offs, and a reduction

 

in reserves on impaired loans of $9.4 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

45

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:

 

December 31, 2022

January 1, 2022

ACL Amount

ACL Amount

Loans

Off-

Balance

Sheet

Total

Percent of

ACL to

Total ACL

Percent of

Loans to

Total Loans

Loans

Off-

Balance

Sheet

Total

Percent of

ACL to

Total ACL

Percent of

Loans to

Total Loans

(Dollars in thousands)

Commercial and industrial

$

12,272

$

245

$

12,517

18

%

19

%

$

10,139

$

107

$

10,246

 

17

%

20

%

Commercial and industrial lines of credit

14,531

 

74

 

14,605

21

18

8,866

44

 

8,910

14

14

Energy

4,396

787

5,183

 

7

 

3

9,190

265

9,455

15

7

Commercial real estate

19,504

700

20,204

29

32

18,933

711

19,644

32

 

30

Construction and land development

5,337

6,830

12,167

17

15

3,666

 

3,914

7,580

12

14

Residential real estate

3,110

35

3,145

4

8

3,046

5

3,051

5

8

Multifamily real estate

2,253

14

2,267

3

4

2,465

137

2,602

4

6

Consumer

372

3

375

1

1

323

1

324

1

1

Gross loans

$

61,775

$

8,688

$

70,463

100

%

100

%

$

56,628

$

5,184

$

61,812

100

%

100

%

Refer to

Note 4: Loans and Allowance for Credit Losses

 

within the Notes to Consolidated Financial Statements for a summary

 

of the

changes in the ACL. Provided below is additional information regarding changes to the ACL:

Charge-offs and Recoveries

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 Year Ended December 31,

2022

2021

2020

Commercial and industrial

-

%

0.07

%

2.41

%

Commercial and industrial lines of credit

0.31

 

2.69

 

1.21

Energy

1.19

0.32

1.24

Commercial real estate

(0.09)

-

0.14

Residential real estate

0.05

(0.08)

0.11

Multifamily real estate

-

(0.01)

-

Consumer

(0.01)

0.04

0.14

Total net charge-offs to average loans

0.08

%

0.30

%

0.89

%

For the year ended December 31, 2022, charge-offs primarily related

 

to three commercial and industrial and commercial and industrial

line of credit borrowers, three energy borrowers and two non-owner

 

occupied commercial real estate borrowers who were unable to meet

their debt obligations.

 

Recoveries totaled $7.0 million for the year ended December 31, 2022 and were primarily

 

related to six commercial

and industrial loans/lines of credit, two energy loans and two non-owner occupied commercial real

 

estate loans that were previously charged-

off.

Non-performing assets and past due loans

Non-performing assets include: (i) non-performing loans - includes non-accrual

 

loans, loans past due 90 days or more and still

accruing interest, and loans modified under TDRs that are not performing in accordance

 

with their modified terms; (ii) foreclosed assets held

for sale; (iii) repossessed assets; and (iv) impaired debt securities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

46

The table below summarizes our non-performing assets and related ratios as of

 

the dates indicated:

For the Year Ended December 31,

2022

2021

2020

Asset quality

(Dollars in thousands)

Non-accrual loans

$

11,272

$

31,432

$

75,051

Loans 90+ days past due and still accruing

750

90

1,024

Total non-performing loans

12,022

31,522

 

76,075

Foreclosed assets held-for-sale

1,130

1,148

2,347

Total non-performing assets

$

13,152

$

32,670

$

78,422

Loans 30 - 89 days past due

$

19,519

$

3,529

$

18,078

Asset quality metrics (%)

2022

2021

2020

Non-performing loans to total loans

0.22

%

0.74

%

1.71

%

Non-performing assets to total assets

0.20

0.58

1.39

ACL to total loans

1.15

1.37

1.70

ACLs + RUC to total loans

(1)

1.31

N/A

N/A

ACL to non-performing loans

514

185

99

Classified Loans / (Capital + ACL)

10.1

10.8

40.9

Classified Loans / (Capital + ACL + RUC)

(1)

10.0

N/A

N/A

(1)

 

Includes the accrual for off-balance sheet credit risk from unfunded

 

commitments that resulted from CECL adoption on January 1, 2022.

Credit quality metrics were significantly improved compared to the prior

 

year. Non-performing assets decreased to $13.2 million at

December 31, 2022 entirely due to a $20.2 million decrease in non-accrual

 

loans. The decline is attributable primarily to payments and

payoffs on non-accrual energy, commercial and industrial and commercial real

 

estate loans during the year. The non-performing assets to

total assets ratio decreased to 0.20% at December 31, 2022 from 0.58%

 

at December 31, 2021. Classified loans decreased $11.2 million

during the year but included the addition of $5.7 million from Central. Without Central, classified

 

assets decreased $16.9 million due to

reductions in classified energy, commercial and industrial and commercial real

 

estate loans.

 

Loans 30-89 days past due increased $16.0

million primarily due to administrative past dues which were short-term

 

in nature.

 

Investment Portfolio

Our investment portfolio is governed by our investment policy that sets our

 

objectives, limits and liquidity requirements among other

items. The portfolio is maintained to serve as a contingent, on-balance sheet source

 

of liquidity. The objective of our investment portfolio is

to optimize earnings, manage credit risk, ensure adequate liquidity, manage

 

interest rate risk, meet pledging requirements and meet

regulatory capital requirements. Our investment portfolio is generally

 

comprised of government sponsored entity securities and U.S. state

and political subdivision securities with limits set on all types of securities.

At the date of purchase, all debt securities are classified as AFS securities. Since interest rates move in cycles, having an AFS portfolio

allows management to: (i) protect against additional unrealized market valuation

 

losses; (ii) provide more liquidity as rates rise, which often

coincides

 

with increasing loan demand and slower deposit growth; and (iii) generate

 

more money to reinvest when rates are higher giving the

institution an opportunity to lock in higher yields. In the event the AFS portfolio becomes too large given the constraints

 

set in the policy,

investments may be classified as held-to-maturity. Held-to-maturity

 

classification will only be used if we have the intent and ability to hold

the investment to its maturity.

At December 31, 2022, AFS debt securities decreased $59 million or 8% from the prior year-end primarily

 

due to the $112 million

increase in unrealized losses. During 2022, the Company purchased $50 million

 

of tax-exempt municipal securities, $48 million of mortgage-

backed securities, $10 million of SBA, and $6 million of corporate

 

securities.

 

During 2021, the Company purchased $117 million of tax-

exempt municipal securities and $108 million of mortgage-backed

 

securities primarily to deploy liquidity into higher yielding interest-

earning assets.

For information related to the book value and fair value of our AFS securities at December 31, 2022 and 2021

 

refer to the “Available-

for-Sale Securities” segment in

Note 3: Securities

 

within the Notes to the Consolidated Financial Statements. For information

 

related to the

investment maturity schedule and weighted average yield for each range of maturities

 

refer to the “Maturity Schedule” segment in

Note 3:

Securities

 

within the Notes to the Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

47

Bank-Owned Life Insurance

The Company maintains investments in BOLI policies to help control employee

 

benefit costs, as a protection against loss of certain

employees and as a tax planning strategy. The decrease in yield during 2022 was primarily due

 

to the Company recognizing $2 million in

tax-free death benefits from a BOLI policy in 2021, coupled with movements

 

in the insurance carrier’s underlying investments and operating

costs that decreased the overall income on the underlying asset.

The following table provides the balance of BOLI income earned and tax-equivalent

 

yield for the periods indicated:

As of or For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Ending balance

$

69,101

$

67,498

$

67,498

Income earned

$

1,602

$

3,483

$

1,809

Tax-equivalent yield

(1)

2.9

%

6.4

%

3.4

%

(1)

Tax exempt income is calculated on a tax-equivalent basis. BOLI income is exempt from federal and state taxes. The incremental tax rate used is 24.7%

between 2020 and 2022.

Deposits

The following table sets forth deposit balances by certain categories as of

 

the dates indicated and the percentage of each deposit

category to total deposits:

As of

 

December 31, 2022

As of

 

December 31, 2021

December 31, 2021 vs.

December 31, 2022

 

% Change

(Dollars in thousands)

Non-interest-bearing deposits

$

1,400,260

$

1,163,224

20.4

%

Transaction deposits

543,801

536,225

1.4

Savings and money market deposits

2,761,680

2,359,761

17.0

Time deposits

(1)

945,567

624,387

51.4

Total deposits

$

5,651,308

$

4,683,597

20.7

%

Total uninsured deposits

(2)

$

2,449,506

$

2,413,533

(1)

Includes $382 million and $91 million of brokered deposits, representing

 

40% and 15% of time deposits for the years ended December

31, 2022 and 2021, respectively.

(2)

Based on estimated amounts of uninsured deposits and are based on the

 

same methodologies and assumptions used for the Bank’s

regulatory reporting requirements.

 

Deposits originate from our markets as well as through participation in certain wholesale

 

programs. Deposit accounts are added by

loan cross-selling, client referrals and involvement within our community. The Company

 

offers a variety of deposit products including non-

interest-bearing demand deposits and interest-bearing deposits that include

 

transaction accounts (including NOW accounts), savings

accounts, money market accounts, and certificates of deposit. The Bank also acquires

 

brokered deposits, internet subscription certificates of

deposit, and reciprocal deposits through the Intrafi Network. The reciprocal deposits include

 

both the Certificate of Deposit Account Registry

Service and Insured Cash Sweep program. The Company is a member of the Intrafi

 

Network which effectively allows depositors to receive

FDIC insurance on amounts greater than the FDIC insurance limit, which is currently

 

$250 thousand. The Intrafi Network allows institutions

to break large deposits into smaller amounts and place them in a network of other

 

Intrafi Network institutions to ensure full FDIC insurance

is gained on the entire deposit.

At December 31, 2022, deposits increased $968 million, or 21%, from

 

the prior year-end including $570

 

million from the Central

acquisition.

 

Non-interest-bearing deposits increased $237 million or 20% from December

 

31, 2021 to December 31, 2022, including $225

million from the Central acquisition. The increase in non-interest-bearing deposits

 

was driven by approximately $544 million of increased

deposits from current clients and approximately $189 million from new

 

deposit relationships and $225 million from Central, partially offset

by deposit withdrawals.

 

At both December 31, 2022

 

and 2021, non-interest-bearing deposits represented 25% of total deposits. Transaction

deposits and savings and money market deposits increased $409 million

 

at December 31, 2022 as compared to December 31, 2021, as a

result of new deposit relationships,

 

increased deposits from current clients and the acquisition of Central. Time deposits increased

 

by $321

million during 2022. Approximately $489 million of time deposits matured in 2022, offset by $829

 

million of new and renewed time

deposits.

 

Brokered time deposits increased during 2022 to meet short-term liquidity needs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

48

The following table sets forth the maturity of time deposits as of December

 

31, 2022:

As of December 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

$

24,769

$

26,203

$

49,409

$

211,123

$

311,504

Time deposits below FDIC insurance limit

164,871

168,450

155,278

145,464

634,063

Total time deposits

$

189,640

$

194,653

$

204,687

$

356,587

$

945,567

Other Borrowed Funds

Since it may not be possible to achieve the institution’s overall funding needs

 

through core deposit funding, other borrowings may be

used to support asset growth. The risks associated with other borrowings are addressed in the same

 

fashion as other financial condition risks

incurred by the Bank. Credit risk, interest rate risk, concentration risk, capital

 

adequacy and liquidity are measured for the consolidated

statement of financial condition as a whole, including any wholesale funding

 

strategies that have been implemented or are expected to be

implemented.

 

The following table sets forth the amounts outstanding and weighted

 

average interest rate of our borrowings as of the dates indicated:

As of December 31,

2022

2021

2020

Amount

Weighted Average

Interest Rate

Amount

Weighted Average

Interest Rate

Amount

Weighted Average

Interest Rate

(Dollars in thousands)

Repurchase agreements

$

—

—

%

$

—

—

%

$

2,306

0.15

%

Federal funds purchased

20,000

4.65

—

—

—

—

FHLB borrowings

(1)

218,111

3.02

236,600

1.92

293,100

1.78

Trust preferred securities

(2)

1,061

6.51

1,009

1.94

963

1.96

TIB line of credit

5,000

7.50

—

—

—

—

SBA loan secured borrowings

9,396

N/A

—

—

—

—

Total other borrowings

$

253,568

3.41

%

$

237,609

1.92

%

$

296,369

1.77

%

(1)

Includes FHLB advances and FHLB line of credit.

(2)

The difference between the interest rate above and the interest rate

 

in the table below is due to the Company assuming a liability

 

with a fair value of $1 million related to

the assumption of trust preferred securities issued by Leawood

 

Bancshares Statutory Trust I for $4 million on September

 

30, 2005. In 2012, the Company settled litigation

related to the trust preferred securities which decreased the principal

 

balance by $2 million and the recorded balance by

 

approximately $400 thousand. The difference

between the recorded amount and the contract value of

 

$3 million is being accreted to the maturity date in

 

2035.

For a description and general terms of the other borrowed funds, refer

 

to

Note 11: Borrowing Arrangements

 

within the Notes to the

Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

49

The following table sets forth the maximum amount at any month end during the

 

reporting period, the weighted average interest rate

and the average balance of other borrowings during the reported period

 

for the years indicated:

 

For the Year Ended

 

December 31,

2022

2021

2020

Maximum

Amount

Outstanding at

Any Month End

Average

Amount

Weighted

Average

Interest Rate

Maximum

Amount

Outstanding at

Any Month End

Average

Amount

Weighted

Average

Interest Rate

Maximum

Amount

Outstanding at

Any Month End

Average

Amount

Weighted

Average

Interest Rate

(Dollars in thousands)

Repurchase agreements

$

5,695

$

827

0.13

%

$

6,218

$

1,821

0.15

%

$

57,259

$

32,265

0.49

%

Federal funds purchased

20,000

7,836

1.22

—

—

—

30,000

2,589

0.19

Federal reserve discount

window

—

—

—

—

—

—

15,000

1,055

0.24

FHLB borrowings

(1)

326,600

224,182

2.11

293,100

277,558

2.10

470,659

382,047

1.66

Trust preferred securities

1,061

1,031

8.83

1,009

982

5.05

963

939

11.34

TIB line of credit

5,000

27

—

—

—

—

—

—

—

SBA loan secured borrowings

$

10,897

1,170

 

N/A

 

$

—

—

—

$

—

—

—

Total other borrowings

$

235,073

2.10

%

$

280,361

2.10

%

$

418,895

1.58

%

(1)

Includes FHLB advances and FHLB line of credit.

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 11: Borrowing Arrangements

 

within the Notes to the Consolidated Financial

Statements for a listing of our December 31, 2022 significant contractual

 

cash obligations to third parties on debt obligations. Refer to

 

Note

6: Leases

 

within the Notes to the Consolidated Financial Statements for a

 

summary of our contractual cash 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 21: Commitments and Credit Risk

 

within the Notes to the

Consolidated Financial Statements

 

for a listing of our December 31, 2022 off-balance sheet arrangements.

 

The Company’s short-term and long

 

-term contractual obligations, including off-balance

 

sheet obligations, may be satisfied through

our on-balance sheet and off-balance sheet liquidity

 

discussed below.

 

Liquidity

Liquidity is the ability to generate adequate amounts of cash from depositors,

 

stockholders, profits or other funding sources, to meet

our needs for funding, including payments to borrowers, operational

 

costs, capital requirements and other strategic cash flow needs.

 

Our liquidity policy governs our approach to our liquidity position. The objective is to maintain

 

adequate, but not excessive, liquidity

to meet the daily cash flow needs of our clients while attempting to achieve

 

adequate earnings for our stockholders. Our liquidity position is

monitored continuously by our finance department.

Liquidity resources can be derived from two sources: (i) on-balance

 

sheet liquidity resources, which represent funds currently on the

consolidated statement of financial condition; and (ii) off-balance sheet liquidity

 

resources, which represent funds available from third-party

sources. On-balance sheet liquidity resources include overnight funds, short

 

-term deposits with other banks, AFS securities, and certain other

sources. Off-balance sheet liquidity resources consist of credit lines, wholesale

 

deposits and debt funding and certain other sources.

On-balance sheet liquidity resources can be broken down into three

 

sections: (i) primary liquidity resources, which represent liquid

funds that are on the consolidated statement of financial condition; (ii)

 

tertiary liquidity resources, which represent assets that can be sold

into the secondary market; and (iii) public funds, which represent deposits. Primary

 

liquidity resources include overnight funds plus short-

term, interest-bearing deposits with other banks and unpledged AFS securities. Tertiary liquidity resources include loans that can

 

be sold into

the secondary market or through participation and unpledged securities classified

 

as held-to-maturity. Public funds are another source of

wholesale deposits as they require collateral.

Off-balance sheet liquidity resources require sufficient collateral, in

 

the form of loans or securities, and have a larger, negative impact

on our capital ratios. As a result, off-balance sheet liquidity has a higher cost on our asset growth compared to deposit growth.

 

Off-balance

sheet liquidity exists in several forms including: (i) internet subscription

 

certificates of deposit; (ii) brokered deposits; (iii) borrowing

capacity; (iv) repurchase agreements; or (v) other sources.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

50

Internet subscription certificates of deposit are deposits made through national,

 

wholesale certificates of deposit funding programs.

These programs are designed to provide funding outside of the Bank’s normal

 

market or existing client base and allow the Bank to diversify

its wholesale funding resources. This form of funding does not require collateral and generally

 

cannot be redeemed early. Brokered deposits

are deposits funded through various broker-dealer relationships. The market

 

for wholesale deposits is well developed. A key feature of this

type of funding is that it is generally unsecured and does not require collateral for

 

pledging.

Borrowing capacity refers to a form of liability-based funding. Repurchase

 

agreements are another source of short-term funding in

which a bank agrees to sell a security to a counterparty and repurchase the same or

 

an identical security from the counterparty at a specified

future date and price. Public funds are another source of wholesale deposits as they

 

require collateral.

Our 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. Other alternative

sources of funds will supplement these primary sources to the extent necessary

 

to meet additional liquidity requirements on either a short-

term or long-term basis. The Company believes that its current liquidity and access to such

 

alternative sources of funds will be sufficient to

meet anticipated cash requirements for the next 12 months and thereafter.

The Consolidated Statements of Cash Flows summarize our sources

 

and uses of cash by type of activity for the years ended

December 31, 2022 and 2021. As of December 31, 2022, we had cash and cash equivalents of $300 million compared

 

to $483 million at

December 31, 2021. The change in cash and cash equivalents was due to an $80 million increase in

 

cash provided by operating activities, a

$620 million decrease in cash provided by investing activities primarily

 

due to strong loan growth and net cash provided by financing

activities of $357 million primarily due to increases in time deposits. During

 

2022, liquid assets decreased as loan growth outpaced deposit

growth. The decrease was partially offset by net cash activity from the Central acquisition of

 

$126 million.

As of December 31, 2022, 2021, and 2020, we had the following available

 

funding:

As of December 31,

2022

2021

2020

(Dollars in thousands)

On-balance sheet liquidity

(1)

$

986,482

$

1,224,253

$

1,046,110

Off-balance sheet liquidity

(2)

770,165

732,748

756,325

Total liquidity

$

1,756,647

$

1,957,001

$

1,802,435

On-balance sheet liquidity

(1)

 

as a percent of assets

15

%

22

%

19

%

Total liquidity as a percent of assets

27

%

35

%

32

%

(1)

On-balance sheet liquidity represents funds currently on the consolidated statements of financial condition. It consists of overnight funds, short-term

deposits with other banks and unpledged AFS securities.

(2)

Off-balance sheet liquidity represents funds available from third-party sources including credit lines, FHLB, and FRB.

Capital Requirements

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. Refer to Item 1. Business under the

“Supervision and Regulation” section for a detailed discussion regarding

 

our capital requirements.

 

Refer to

Note 14: Regulatory Matters

 

in the Notes to the Consolidated Financial Statements for the table that

 

summarizes the capital

requirements applicable to the Company and the Bank in order to be considered

 

“well-capitalized” from a regulatory perspective, as well as

the Company’s and the Bank’s capital ratios as of December 31, 2022

 

and 2021. The Bank exceeded all regulatory capital requirements

under Basel III, and the Bank was considered to be “well-capitalized” for

 

the periods ended December 31, 2022 and 2021.

 

Stockholders’ Equity

For the year ended December 31, 2022, the Company’s stockholders’ equity decreased primarily due to changes to the unrealized

 

loss

on AFS securities,

 

the impact of Central and share repurchases, partially offset by an increase in

 

net income.

Changes in stockholders’ equity for the fiscal years ended December 31, 2020, 2021, and 2022

 

are provided in the Consolidated

Statements of Stockholders’ Equity. Additional information regarding the Company’s stock activity is provided in

Note 19: Stockholders’

Equity

 

within the Notes to the Consolidated Financial Statements.

 

Table of Contents

51

Interest Rate Sensitivity

A primary component of market risk is interest rate volatility. Managing interest rate risk is a key element of our

 

consolidated

statement of financial condition management. Interest rate risk is the risk that net

 

interest margins will be eroded over time due to changing

market conditions. Many factors can cause margins to erode including, without

 

limitation, (i) lower loan demand; (ii) increased competition

for funds; (iii) weak pricing policies; (iv) statement of financial condition

 

mismatches; and (v) changing liquidity demands. We manage our

sensitivity position in accordance with our interest rate risk policy. The management

 

of interest rate risk is a three-step process and involves:

(i) measuring the interest rate risk position; (ii) policy constraints; and (iii)

 

strategic review and implementation.

Our exposure to interest rate risk is managed by the Bank’s Asset/Liability Committee (“ALCO”) in accordance

 

with policies

approved by the Bank’s board of directors. ALCO uses a combination of three systems to measure the statement of financial

 

condition’s

interest rate risk position. Because each system serves a different purpose and

 

provides a different perspective, 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 (“EVE”).

•

 

A gap report measures the repricing volume of assets and liabilities by time period. The difference between repricing assets and

repricing liabilities for a particular time period is known as the periodic repricing

 

gap. Using this method, it is possible to estimate

the impact on earnings of a given rate change. As a method of evaluating interest rate risk, the gap report is a reasonably

 

accurate

method of assessing earnings exposure. However, its reliability diminishes

 

as statement of financial condition complexity increases.

Optionality and other factors complicate the analysis.

•

 

An earnings simulation measures the effect of changing interest rates on net interest

 

income and earnings. Earnings simulation is

more detailed than gap analysis. Under this approach, the repricing characteristics

 

of each asset and liability instrument are

programmed into a computer simulation model. This programming allows the Bank

 

to refine important characteristics such as caps,

floors, and time lag. It also allows the Bank to include the impact of new business

 

activity in the analysis. Gap reporting only

considers the existing statement of financial condition position.

•

 

EVE is a valuation approach to measuring long-term interest rate risk exposure. This approach

 

considers all future time periods,

which provides an advantage over earnings simulation. However, a negative

 

attribute of EVE is that it assumes a sustained change

in rates, which is never the case in the long-term. This seeks to compute the financial risk of having

 

a duration mismatch between

assets and funding.

In addition, ALCO compares the current interest rate risk position to policy limits. This procedure is compliance oriented and results

in either a pass or fail outcome. When the statement of financial condition is in compliance, no

 

further action is necessary. In instances of

noncompliance, ALCO will develop a plan of action to correct the condition. A summary of the plan and its timing for completion will be

forwarded to the board of directors each quarter until compliance is reestablished.

ALCO also evaluates interest rate risk positioning in light of anticipated

 

interest rates. The purpose of this comparison is to determine

whether action steps need to be taken to modify current strategy. The results form a

 

decision-making input for ALCO. If it is determined that

more asset sensitivity is needed, ALCO will either increase rate sensitive assets or reduce rate sensitive liabilities. The opposite

 

will occur if

less asset sensitivity is desired.

Loan and deposit repricing assumptions are critical in measuring interest rate risk.

 

For loans, management reviews spreads and

prepayment assumptions. For deposits, management reviews beta

 

factors and decay assumptions. ALCO reviews and adjusts repricing

assumptions at least annually. Model assumptions are included in the output

 

reports and reviewed by ALCO on a periodic basis.

When evaluating statement of financial condition rate sensitivity, a proper

 

analysis of total funding is of critical importance. The

funding side of the statement of financial condition can be segregated

 

into three broad categories, as follows: (i) funding with defined

maturity dates; (ii) non-maturity deposits; and (iii) perpetual funding.

 

•

 

Funding with defined maturity dates includes certificates of deposit and

 

borrowed funds. The repricing analysis requires a twofold

statement of behavior for each statement of financial condition

 

category. It requires a cash flow schedule for principal and interest

payments and a repricing schedule of rate adjustments. Once the cash flow

 

and repricing projections are developed, the category can

be analyzed for interest rate risk exposure.

•

 

Non-maturity deposits tend to be a longer term, less volatile source

 

of funds. Non-maturity deposits have very short contractual

lives. The Bank uses historical analysis to develop its decay assumptions, but it looks at aggregate

 

account types rather than

individual clients. The review analyzes both non-maturity deposits as a whole and individual

 

deposit categories.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

52

•

 

Perpetual funding is the most stable and least costly source of funding. Its main

 

component is equity capital. It has a zero interest

rate and cannot be withdrawn by stockholders because of a rate change.

 

In effect, it is a perpetual source of free funding.

 

Periodic independent evaluations are conducted and documented. Each

 

evaluation consists primarily of: (i) an assessment of internal

controls; (ii) an evaluation of data integrity; (iii) the appropriateness of

 

the risk management system; (iv) the reasonableness of validity

scenarios; (v) a review of ALCO’s charter; and (vi) validation of calculations. In addition, to ensure the model is working as expected

 

a back

test of the model is completed at least annually.

All of the assumptions used in our analysis are inherently uncertain and,

 

as a result, the model cannot precisely measure future net

interest income or precisely predict the impact of fluctuations in market interest

 

rates on net interest income. Actual results may differ from

the model’s simulated results due to timing, magnitude and frequency

 

of interest rate changes as well as changes in market conditions and the

application and timing of various management strategies.

On a quarterly basis, we run various simulation models including a static statement of

 

financial condition and dynamic growth

statement of financial condition. These models test the impact on net interest income and fair value

 

of equity from changes in market interest

rates under various scenarios. Under the static model and dynamic growth

 

models, rates are shocked instantaneously and ramped rates

change over a 12-month horizon based upon parallel and nonparallel yield

 

curve shifts. Parallel shock scenarios assume instantaneous

parallel movements in the yield curve compared to a flat yield curve scenario. Nonparallel

 

simulation involves analysis of interest income

and expense under various changes in the shape of the yield curve.

Our internal policy regarding internal rate risk simulations currently

 

specifies that for instantaneous parallel shifts of the yield curve,

estimated net interest income at risk for the subsequent one-year period

 

should not decline by more than 10% for a -200 basis point shift,

15% for a -300 basis point shift, 5% for a -100 basis point shift, 5% for a 100 basis point

 

shift, 10% for a 200 basis point shift, and 15% for a

300 basis point shift.

The Company has several instruments that can be used to manage interest rate risk,

 

including: (i) modifying the duration of interest-

bearing liabilities; (ii) modifying the duration of interest-earning assets, including

 

our investment portfolio; and (iii) entering into on-balance

sheet derivatives. Based upon the nature of our operations, we are not subject to

 

foreign exchange or commodity price risk.

ALCO evaluates interest rate risk using a rate shock method and rate ramp method.

 

In a rate shock analysis, rates change immediately

and the change is sustained over the time horizon. In a rate ramp analysis, rate changes

 

occur gradually over time. The following tables

summarize the simulated changes in net interest income and fair value of

 

equity over a 12-month horizon using a rate shock and rate ramp

method as of the dates indicated:

Hypothetical Change in Interest Rate - Rate Shock

December 31, 2022

December 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

7.9

%

(9.9)

%

7.9

%

(7.7)

%

+200

5.3

(6.4)

4.6

(4.7)

+100

2.6

(2.7)

1.5

(2.7)

Base

—

%

—

%

—

%

—

%

-100

(2.7)

2.6

NA

(1)

NA

(1)

-200

(5.4)

5.1

NA

(1)

NA

(1)

-300

(11.2)

6.3

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

53

Hypothetical Change in Interest Rate - Rate Ramp

December 31, 2022

December 31, 2021

Change in Interest Rate

(Basis Points)

Percent Change in Net Interest Income

Percent Change in Net Interest Income

+300

3.4

%

3.4

%

+200

2.3

1.9

+100

1.1

0.6

Base

—

%

—

%

-100

(1.1)

NA

(1)

-200

(2.3)

NA

(1)

-300

(3.9)

NA

(1)

(1)

The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment.

The hypothetical positive change in net interest income as of December

 

31, 2022

 

in an up 100 environment is primarily due to

approximately 63% of the Company’s earning assets adjusting within

 

the first year. In addition, the Company’s time deposits and other

borrowings will continue to mature. Loans remain the largest portion of our

 

adjustable earning assets, as the mix of adjustable loans or those

maturing in one year was 69%.

The models the Company uses include assumptions regarding interest rates

 

and balance changes.

 

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 may differ from simulated results due to timing, magnitude and frequency

 

of interest rate changes

as well as changes in market conditions, client behavior and management

 

strategies, among other factors.

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. We base our

 

estimates on historical experience and on various other

assumptions that we believe to be reasonable under current circumstances. These assumptions

 

form the basis for our judgments about the

carrying values of assets and liabilities that are not readily available from independent,

 

objective sources. We evaluate our estimates on an

ongoing basis. Use of alternative assumptions may have resulted in significantly

 

different estimates. Actual results may differ from these

estimates.

The Company qualifies as an EGC under the JOBS Act. Section 107 of the JOBS Act provides that an EGC can take advantage of the

extended transition period when complying with new or revised accounting

 

standards. This allows an EGC to delay adoption of certain

accounting standards until those standards would apply to private companies;

 

however, the EGC can still early adopt new or revised

accounting standards, if applicable. We have elected to take advantage of this extended

 

transition period, which means the financial

statements in this Form 10-K, as well as financial statements we file in the future,

 

will be subject to all new or revised accounting standards

generally applicable to private companies, unless stated otherwise. This decision will remain

 

in effect until the Company loses its EGC

status.

Our most significant accounting policies are described in

Note 1: Nature of Operations and Summary of Significant Accounting

Policies

 

within the Notes to the Consolidated Financial Statements. We identified the

 

following 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 our

financial statements to those judgments and assumptions, are critical to

 

an understanding of our financial condition and results of operations.

Allowance for Credit Losses

The determination of the ACL, which represents management’s estimate of expected lifetime credit loss is recognized

 

at the origination or

purchase of an asset, including those acquired through a business combination,

 

which is then reassessed at each reporting date over the

contractual life of the asset. The calculation of expected credit losses includes consideration

 

of past events, current conditions, and reasonable

and supportable economic forecasts that affect the collectability of the

 

reported amounts. Generally, expected credit losses are determined

through a pooled, collective assessment of loans and leases with similar risk characteristics.

 

However, if the risk characteristics of a loan or

lease change such that it no longer matches that of the collectively assessed pool, it is removed

 

from the population and individually assessed

for credit losses. The total ACL on loans and leases recorded by management represents the aggregated estimated credit loss determined

through both the collective and individual assessments.

 

See

Note 4: Loans and Allowance for Credit Losses

 

in the Notes to the Consolidated

Financial Statements for additional information.

Table of Contents

54

Although management believes the levels of the allowance for credit losses at December

 

31, 2022 are adequate to absorb expected credit

losses, if actual results are materially different from the judgments and uncertainties

 

made, the Company would be required to increase

(decrease) its credit losses provision resulting in a decrease (increase) in

 

net income.

 

Business Combinations

The Company applies the acquisition method of accounting for

 

business combinations in accordance with ASC 805, Business Combinations.

Under the acquisition method, the acquiring entity in a business combination

 

recognizes all of the identifiable assets acquired and liabilities

assumed at their acquisition date fair values. Management utilizes prevailing

 

valuation techniques appropriate for the asset or liability being

measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired,

 

including identifiable

intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated

 

to assets acquired and liabilities assumed is

greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed

 

as incurred.

 

See

Note 2:

Acquisition Activities

 

in the Notes to the Consolidated Financial Statements for further informatio

 

n.

Recent Accounting

 

Pronouncements

Refer to

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

within the Notes to the Consolidated Financial

Statements included elsewhere in this form 10-K.

 

Item 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

The information included under the caption “Interest Rate Sensitivity” in

 

Management’s Discussion and Analysis is incorporated

herein by reference.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

55

Item 8.

 

Financial Statements and Supplementary Data

Section

Page Number

Report of FORVIS, LLP Independent Registered Public Accounting Firm

56

Consolidated Statements of Financial Condition

58

Consolidated Statements of Operations

59

Consolidated Statements of Comprehensive (Loss) Income

60

Consolidated Statements of Stockholders’ Equity

61

Consolidated Statements of Cash Flows

62

Notes to Consolidated Financial Statements

63

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

63

Note 2: Acquisition Activities

69

Note 3: Securities

72

Note 4: Loans and Allowance for Credit Losses

75

Note 5: Premises and Equipment

88

Note

6

: Leases

88

Note

7

: Goodwill and Core Deposit Intangibles

89

Note

8

: Derivatives and Hedging Activities

90

Note

9

: Foreclosed Assets

92

Note 1

0

: Interest-bearing Time Deposits

92

Note 1

1

: Borrowing Arrangements

93

Note 12: Income Taxes

94

Note 1

3

: Changes in Accumulated Other Comprehensive Income

95

Note 1

4

: Regulatory Matters

95

Note 1

5

: Employee Benefit Plan

96

Note 1

6

: Revenue from Contracts with Clients

97

Note 17: Stock-Based Compensation

97

Note 18: Stock Warrants

100

Note 19: Stockholders’ Equity

101

Note 20: Disclosure about Fair Market Value of Financial Instruments

101

Note 21

: Commitments and Credit Risk

104

Note 2

2

: Parent Company Condensed Financial Statements

105

Note 2

3

: Subsequent Events

106

Table of Contents

56

 

Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors and Audit Committee

CrossFirst Bankshares, Inc.

Leawood, Kansas

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of CrossFirst Bankshares,

Inc. (the “Company”) as of December 31, 2022 and 2021, the related

 

consolidated statements of operations,

comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year

period ended December 31, 2022, and the related notes (collectively referred

 

to as the “financial statements”).

 

In our opinion, the consolidated financial statements referred to above present

 

fairly, in all material respects,

the financial position of the Company as of December 31, 2022

 

and 2021, and the results of its operations and

its cash flows for each of the years in the three-year period ended December

 

31, 2022, in conformity with

accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed

 

in Note

 

1 to

 

the consolidated

 

financial statements,

 

the Company

 

changed its

 

method of

 

accounting

 

for the

recognition

 

and

 

measurement

 

of

 

credit

 

losses

 

as

 

of

 

January

 

1,

 

2022,

 

due

 

to

 

the

 

adoption

 

of ASU

 

2016-13,

Financial

Instruments

 

-

Credit

 

Losses

 

(Topic

 

326):

Measurement

 

of

 

Credit

 

Losses

 

on

 

Financial

 

Instruments

 

and

 

its

 

related

amendments.

As discussed in Note 1

 

to the consolidated financial statements,

 

the Company changed its method

 

of accounting for leases

as of January 1, 2022, due to the adoption of ASU 2016-02

Leases

 

(Topic 842).

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to

 

express

an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United

States) (“PCAOB”) and are required to be independent with respect to

 

the Company in accordance with the

U.S. federal securities laws and the applicable rules and regulations

 

of the Securities

 

and Exchange

Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we

plan and perform the audits to obtain reasonable assurance about whether

 

the consolidated financial

statements are free of material misstatement, whether due to error or fraud.

 

 

Table of Contents

57

Our audits included procedures to assess the risks of material misstatement,

 

whether due to error or fraud,

and performing procedures that respond to those risks. Such procedures include examining,

 

on a test basis,

evidence supporting the amounts and disclosures in the financial statements.

 

Our audits also included

evaluating the accounting principles used and significant estimates made

 

by management, as well as

evaluating the overall presentation of the financial statements. We believe that our audits provide a

reasonable basis for

 

our opinion.

(Formerly, BKD, LLP)

We

have served as the Company’s auditor since 2009.

Kansas City, Missouri

March 3, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

See Notes to Consolidated Financial Statements

58

CrossFirst Bankshares, Inc.

Consolidated Statements of Financial Condition

As of December 31,

2022

2021

(Dollars in thousands)

Assets

Cash and cash equivalents

$

300,138

$

482,727

Available-for-sale securities - taxable

198,808

192,146

Available-for-sale securities - tax-exempt

488,093

553,823

Loans, net of allowance for credit losses of $

61,775

 

and $

58,375

 

at December 31, 2022 and

2021, respectively

5,310,954

4,197,838

Premises and equipment, net

65,984

66,069

Restricted equity securities

12,536

11,927

Interest receivable

29,507

16,023

Foreclosed assets held for sale

1,130

1,148

Goodwill and other intangible assets, net

29,081

130

Bank-owned life insurance

69,101

67,498

Other

95,754

32,128

Total assets

$

6,601,086

$

5,621,457

Liabilities and stockholders’ equity

Deposits

 

Non-interest-bearing

$

1,400,260

$

1,163,224

Savings, NOW and money market

3,305,481

2,895,986

Time

945,567

624,387

Total deposits

5,651,308

4,683,597

Federal Home Loan Bank advances

218,111

236,600

Other borrowings

35,457

1,009

Interest payable and other liabilities

87,611

32,678

Total liabilities

5,992,487

4,953,884

Stockholders’ equity

Preferred stock, $

0.01

 

par value:

 

Authorized -

5,000,000

 

shares, issued -

none

-

-

Common stock, $

0.01

 

par value:

 

Authorized -

200,000,000

 

shares, issued -

53,036,613

 

and

52,590,015

 

shares at December 31, 2022 and 2021, respectively

530

526

Treasury stock, at cost:

4,588,398

 

and

2,139,970

 

shares held at December 31, 2022 and 2021,

respectively

(64,127)

(28,347)

Additional paid-in capital

530,658

526,806

Retained earnings

206,095

147,099

Accumulated other comprehensive (loss) income

(64,557)

21,489

Total stockholders’ equity

608,599

667,573

Total liabilities and stockholders’ equity

$

6,601,086

$

5,621,457

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

See Notes to Consolidated Financial Statements

59

CrossFirst Bankshares, Inc.

Consolidated Statements of Operations

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands, except per share data)

Interest Income

Loans, including fees

$

224,138

$

174,660

$

183,738

Available-for-sale securities - taxable

4,577

3,273

5,073

Available-for-sale securities - tax-exempt

15,338

14,033

13,013

Deposits with financial institutions

3,751

502

639

Dividends on bank stocks

709

682

985

Total interest income

248,513

193,150

203,448

Interest Expense

Deposits

49,982

18,523

36,585

Fed funds purchased and repurchase agreements

96

3

164

Federal Home Loan Bank Advances

4,759

5,837

6,341

Other borrowings

142

96

109

Total interest expense

54,979

24,459

43,199

Net Interest Income

193,534

168,691

160,249

Provision for Credit Losses

11,501

(4,000)

56,700

Net Interest Income after Provision for Credit Losses

182,033

172,691

103,549

Non-Interest Income

 

 

 

Service charges and fees on customer accounts

6,228

4,580

2,803

Realized gains on available-for-sale securities

96

1,023

1,704

Gain on sale of loans

47

-

44

(Losses) gains, net on equity securities

(181)

(6,325)

46

Income from bank-owned life insurance

1,602

3,483

1,809

Swap fees and credit valuation adjustments, net

188

275

(204)

ATM and credit card interchange income

6,523

7,996

4,379

Other non-interest income

2,778

2,628

1,152

Total non-interest income

17,281

13,660

11,733

Non-Interest Expense

 

 

 

Salaries and employee benefits

75,288

61,080

57,747

Occupancy

10,663

9,688

8,701

Professional fees

5,275

3,519

4,218

Deposit insurance premiums

3,354

3,705

4,301

Data processing

4,750

2,878

2,719

Advertising

3,201

2,090

1,219

Software and communication

5,093

4,234

3,750

Foreclosed assets, net

(17)

697

1,239

Goodwill impairment

-

-

7,397

Other non-interest expense

14,135

11,491

8,677

Total non-interest expense

121,742

99,382

99,968

Net Income Before Taxes

77,572

86,969

15,314

Income tax expense

15,973

17,556

2,713

Net Income

$

61,599

$

69,413

$

12,601

Basic Earnings Per Share

$

1.24

$

1.35

$

0.24

Diluted Earnings Per Share

$

1.23

$

1.33

$

0.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

See Notes to Consolidated Financial Statements

60

CrossFirst Bankshares, Inc.

Consolidated Statements of Comprehensive (Loss) Income

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Net Income

$

61,599

$

69,413

$

12,601

Other Comprehensive (Loss) Income

Unrealized (loss) gain on available-for-sale securities

(111,661)

(8,894)

18,847

Less: income tax (benefit) expense

(26,870)

(2,182)

4,606

Unrealized gain (loss) on available-for-sale securities, net of income tax

(84,791)

(6,712)

14,241

Reclassification adjustment for realized gains included in income

96

1,023

1,704

Less: income tax expense

24

245

415

Reclassification adjustment for realized gains included in income, net of

 

income tax

72

778

1,289

Unrealized loss on cash flow hedges

(1,551)

(562)

-

Less: income tax benefit

(368)

(138)

-

Unrealized loss on cash flow hedges, net of income tax

(1,183)

(424)

-

Other comprehensive (loss) income

(86,046)

(7,914)

12,952

Comprehensive (Loss) Income

$

(24,447)

$

61,499

$

25,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

See Notes to Consolidated Financial Statements

61

CrossFirst Bankshares, Inc.

Consolidated Statements of Stockholders’ Equity

Preferred Stock

Common Stock

Treasury

Additional

Paid in

Retained

Accumulated

Other

Comprehensive

Shares

Amount

Shares

Amount

Stock

Capital

Earnings

Income (Loss)

Total

(Dollars in thousands)

December 31, 2019

—

$

—

51,969,203

 

$

 

520

 

$

 

—

 

$

 

519,870

 

$

 

64,803

 

$

 

16,451

 

$

 

601,644

Adoption of ASU 2018-07

—

—

—

—

—

(238)

204

—

(34)

Net income

—

—

—

—

—

—

12,601

—

12,601

Other comprehensive income - available-for-

sale securities

—

—

—

—

—

—

—

12,952

12,952

Issuance of shares from equity-based awards

—

—

319,926

3

—

(1,087)

—

—

(1,084)

Open market common share repurchases

—

—

(609,613)

—

(6,061)

—

—

—

(6,061)

Employee receivables from sale of stock

—

—

—

—

—

3

44

—

47

Stock-based compensation

—

—

—

—

—

4,363

—

—

4,363

December 31, 2020

—

—

51,679,516

523

(6,061)

522,911

77,652

29,403

624,428

Net income

—

—

—

—

—

—

69,413

—

69,413

Other comprehensive loss - available-for-sale

securities

—

—

—

—

—

—

—

(7,490)

(7,490)

Other comprehensive loss - cash flow hedges

—

—

—

—

—

—

—

(424)

(424)

Issuance of shares from equity-based awards

—

—

300,886

3

—

(689)

—

—

(686)

Open market common share repurchases

—

—

(1,530,357)

—

(22,286)

—

—

—

(22,286)

Employee receivables from sale of stock

—

—

—

—

—

—

34

—

34

Stock-based compensation

—

—

—

—

—

4,584

—

—

4,584

December 31, 2021

—

—

50,450,045

526

(28,347)

526,806

147,099

21,489

667,573

Adoption of ASU 2016-13

—

—

—

—

—

—

(2,610)

(2,610)

Net income

—

—

—

—

—

—

61,599

—

61,599

Other comprehensive loss - available-for-sale

securities

—

—

—

—

—

—

—

(84,863)

(84,863)

Other comprehensive loss - cash flow hedges

—

—

—

—

—

—

—

(1,183)

(1,183)

Issuance of shares from equity-based awards

—

—

446,598

4

—

(565)

—

—

(561)

Open market common share repurchases

—

—

(2,448,428)

—

(35,780)

—

—

—

(35,780)

Employee receivables from sale of stock

—

—

—

—

—

—

7

—

7

Stock-based compensation

—

—

—

—

—

4,417

—

—

4,417

December 31, 2022

—

$

—

48,448,215

$

530

$

(64,127)

$

530,658

$

206,095

$

(64,557)

$

608,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

See Notes to Consolidated Financial Statements

62

CrossFirst Bankshares, Inc.

Consolidated Statements of Cash Flows

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Operating Activities

Net income

$

61,599

$

69,413

$

12,601

Adjustments to reconcile net income to

 

net cash provided by operating activities:

 

 

 

Depreciation and amortization

5,305

5,260

5,252

Provision for loan losses

11,501

(4,000)

56,700

Accretion of discounts on loans

(252)

-

-

Accretion of discounts and amortization

 

of premiums on securities

4,288

5,067

6,084

Stock-based compensation

4,417

4,584

4,363

(Gain) loss on disposal of fixed assets

(77)

(123)

101

Loss on sale of foreclosed assets and related

 

impairments

(62)

572

1,156

Gain on sale of loans

(47)

-

(44)

Deferred income taxes

(1,970)

2,664

(5,257)

Net increase in bank owned life insurance

(1,602)

(3,483)

(1,809)

Net gains (losses) on equity securities

181

6,325

(46)

Net realized gains on available-for-sale securities

(96)

(1,023)

(1,704)

Goodwill impairment

-

-

7,397

Dividends on FHLB stock

(699)

(679)

(983)

Prepayment penalties on extinguishment

 

of debt

-

771

-

Changes in:

 

 

 

Interest receivable

(10,970)

1,213

(1,520)

Other assets

1,814

(533)

(103)

Other liabilities

7,023

2,343

(1,735)

Net cash provided by operating activities

80,353

88,371

80,453

Investing Activities

Net change in loans

(732,041)

172,764

(640,029)

Purchases of available-for-sale and equity securities

(116,136)

(225,719)

(76,218)

Proceeds from maturities of available-for-sale

 

securities

80,091

103,488

142,057

Proceeds from sale of available-for-sale and equity

 

securities

20,109

20,867

31,810

Proceeds from the sale of foreclosed assets

237

628

1,045

Purchase of premises and equipment

(2,569)

(1,211)

(6,093)

Proceeds from the sale of premises and equipment

 

and related insurance claims

147

608

121

Purchase of restricted equity securities

(13,175)

-

(2,839)

Proceeds from sale of restricted equity

 

securities

14,352

4,295

5,556

Proceeds from termination of cash flow hedge

3,290

-

-

Proceeds from death benefit on bank owned

 

life insurance

-

3,483

-

Net cash activity from acquisition

125,749

-

-

Net cash (used in) provided by investing activities

(619,946)

79,203

(544,590)

Financing Activities

Net increase in demand deposits, savings,

 

NOW and money market accounts

94,529

407,952

967,245

Net increase (decrease) in time deposits

302,889

(419,095)

(196,264)

Net decrease in fed funds purchased and

 

repurchase agreements

-

(2,306)

(12,615)

Net increase in federal funds sold

20,000

-

-

Proceeds from Federal Home Loan Bank advances

50,000

-

138,000

Repayment of Federal Home Loan Bank

 

advances

(154,048)

(57,271)

(203,643)

Net proceeds from lines of credit

79,968

-

-

Issuance of common shares, net of issuance

 

cost

4

3

3

Proceeds from employee stock purchase

 

plan

364

172

151

Repurchase of common stock

(35,780)

(22,286)

(6,061)

Acquisition of common stock for tax

 

withholding obligations

(929)

(860)

(1,236)

Net decrease in employee receivables

7

34

47

Net cash provided by (used in) financing activities

357,004

(93,657)

685,627

(Decrease) increase in Cash and Cash

 

Equivalents

(182,589)

73,917

221,490

Cash and Cash Equivalents, Beginning of Period

482,727

408,810

187,320

Cash and Cash Equivalents, End of Period

$

300,138

$

482,727

$

408,810

Supplemental Cash Flows Information

 

 

 

Interest paid

$

50,604

$

25,287

$

45,619

Income taxes paid

15,499

12,554

9,692

Equity interest assumed in partial satisfaction

 

of loans

-

-

11,189

Foreclosed assets in settlement of loans

$

-

$

-

$

930

 

 

 

 

Table of Contents

63

CrossFirst Bankshares, Inc.

Notes to Consolidated Financial Statements

Note 1:

 

Nature of Operations and Summary of Significant Accounting Policies

Organization and Nature of Operations

CrossFirst Bankshares, Inc., a Kansas corporation (the “Company”), is a bank

 

holding company whose principal activities are the

ownership and management of its wholly owned subsidiary, CrossFirst Bank (the

 

“Bank”). The Bank has

three

 

wholly owned subsidiaries:

(i) CrossFirst Investments, Inc., which holds investments in marketable

 

securities; (ii) CFBSA I, LLC, which can hold foreclosed assets; and

(iii) CFBSA II, LLC, which can hold foreclosed assets.

The Bank is primarily engaged in providing a full range

 

of banking and financial services to individual and corporate clients 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; (viii) Phoenix, Arizona (ix) Colorado Springs, Colorado; (x) Denver, Colorado; and (xi)

 

Clayton, New

Mexico.

 

The Bank is subject to competition from other financial institutions and the regulation

 

of certain federal and state agencies and

undergoes periodic examinations by those regulatory authorities.

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 Compa

 

ny; the Bank and its wholly-owned subsidiaries,

CrossFirst Investments, Inc., CFBSA I, LLC and CFBSA II, LLC. All significant intercompany accounts and transactions were eliminated in

consolidation.

The preparation of financial statements in conformity with GAAP requires management to make

 

estimates and assumptions that

affect the reported amounts of assets and liabilities and disclosure of

 

contingent assets and liabilities at the date of the financial statements

and the reported amounts of revenues and expenses during the reporting

 

period. Actual results could differ from those estimates. Material

estimates that are particularly susceptible to significant change relate to

 

the determination of the allowance for credit losses, valuation of

deferred tax assets, stock-based compensation, derivatives, and fair values

 

of financial instruments.

For the year ended December 31, 2022, the Company broke out

 

the “Goodwill and other intangible assets, net” that was previously

reported in “other assets” within the consolidated statements of financial

 

condition.

 

As a result, changes within the consolidated statements of

financial condition in the prior periods were made to conform to the current period presentation. The

 

change was due to goodwill and

intangible assets that were added during 2022 related to the acquisition of

 

Farmers & Stockmens Bank (“Central”). The change had no

impact on net income.

Summary of Significant Accounting

 

Policies

Cash Equivalents - The Company considers all liquid investments with original maturities of

 

three months or less to be cash

equivalents. At December 31, 2022, cash equivalents consisted primarily of both interest-bearing and non-interest-bearing

 

accounts with

other banks. Approximately $

273

 

million of the Company’s cash and cash equivalents were held at the Federal Reserve Bank

 

of Kansas City

at December 31, 2022. The Company is required to maintain reserve funds in cash and/or on

 

deposit with the Federal Reserve Bank. The

reserve required at December 31, 2022 was $

0

. In addition, the Company is required from time to time to place cash collateral with third

parties as part of its back-to-back swap agreements and cash flow hedges. At December 31, 2022,

no

 

cash collateral was required. At

December 31, 2022, the Company’s cash accounts, excluding funds at the

 

Federal Reserve Bank and funds required as cash collateral,

exceeded federally insured limits by $

9

 

million.

Securities -

Debt securities for which the Company has no immediate plan to sell but which may be

 

sold in the future, are classified

as available-for-sale (“AFS”) and recorded at fair value, with unrealized gains

 

and losses excluded from earnings and reported in other

comprehensive (loss) income. Purchase premiums and discounts are recognized

 

in interest income using the interest method over the terms

of the securities. Gains and losses on the sale of debt securities are recorded on the

 

trade date and are determined using the specific

identification method.

Equity securities are recorded at fair value with unrealized gains and

 

losses included in earnings. Gains and losses on the sale of

equity securities are recorded on the trade date and are determined using

 

the specific identification method.

 

The Company elected a measurement alternative for three private

 

equity investments

 

that did not have a readily determinable fair

value and did not qualify for the practical expedient to estimate fair value using the

 

net asset value per share. A cost basis was calculated for

the equity investments. The recorded balance will adjust for any impairment or any observable

 

price changes for an identical or similar

investment of the same issuer.

 

 

 

Table of Contents

64

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. The Company

 

has elected to exclude accrued interest

receivable (“AIR) from investment securities from the credit loss assessment as interest deemed

 

uncollectible is written off through interest

income.

Prior to t

 

he adoption of ASU 2016-13, declines in the fair value of AFS securities below their cost that were deemed to be other-

than-temporarily impaired were reflected in earnings as realized losses.

 

In estimating other-than-temporary-impairment prior to January 1,

2020, the Company considered, among other things, the severity and duration

 

of the unrealized loss position; adverse conditions specifically

related to the security; changes in expected future cash flows; downgrades

 

in the rating of the security by a rating agency; the failure of the

issuer to make scheduled interest or principal payments; whether the Company

 

had the intent to sell the security; and whether it was more

likely than not that the Company would be required to sell the security.

Loans -

Loans that management has the intent and ability to hold for the foreseeable future or until maturity

 

or payoff are reported at

their outstanding principal balances adjusted for unearned income,

 

charge-offs, the allowance for loan losses, any unamortized deferred fees

or costs on originated loans and unamortized premiums or discounts on purchased

 

loans.

For loans amortized at cost, interest income is accrued based on the unpaid

 

principal balance. Loan origination fees, net of certain

direct origination costs, as well as premiums and discounts, are deferred and

 

amortized as a level yield adjustment over the respective term of

the loan.

The accrual of interest on mortgage and commercial loans is discontinued

 

at the time the loan is 90 days past due unless the credit is

well secured and in process of collection. A credit is considered well secured if it is secured by collateral in the form of liens or pledges of

real or personal property, including securities, that have a realizable value

 

sufficient to discharge the debt (including accrued interest) in full

or is secured by the guaranty of a financially responsible party. A debt is in the process of collection if collection of the debt is proceeding in

due course either through legal action, including enforcement procedures,

 

or in appropriate circumstances, through collection efforts not

involving legal action which are reasonably expected to result in repayment

 

of the debt or in its restoration to a current status. 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.

All interest accrued but not collected for loans that are placed on non-accrual

 

or charged off are reversed against interest income.

The interest on these loans is accounted for on the cash basis or cost recovery method,

 

until qualifying for return to accrual. When payments

are received on non-accrual loans, payments are applied to principal unless there

 

is a clear indication that the quality of the loan has

improved to the point that it can be placed back on accrual status. Loans are

 

returned to accrual status when all the principal and interest

amounts contractually due are brought current and future payments are reasonably

 

assured.

Allowance for Credit Losses (“ACL”) - The Company adopted ASU 2016-13,

Measurement of Credit Losses on Financial

Instruments

, effective January 1, 2022. 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.

The Company uses 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

Company has elected to exclude accrued interest receivable from

 

the ACL process, because a timely write-off policy exists.

Unfunded loan commitments

In addition to the ACL for funded loans, the Company maintains reserves to cover

 

the risk of loss associated with off-balance sheet

unfunded loan commitments. The allowance for off-balance sheet credit

 

losses is maintained within the other liabilities in the statements of

financial condition. Under the CECL framework, adjustments to this liability

 

are recorded as provision for credit losses in the statements of

operations. Unfunded loan commitment balances are evaluated by loan class and

 

further segregated by revolving and non-revolving

commitments. In order to establish the required level of reserve, the

 

Company applies average historical utilization rates and ACL loan

model loss rates for each loan class to the outstanding unfunded commitment

 

balances.

 

 

 

 

 

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65

Refer to

Note 4: Loans and Allowance for Credit Losses

 

for additional information regarding the policies, procedures,

 

and credit

quality indicators used by the Company.

Prior to the adoption of ASU 2016-13, the Company’s

 

determination of the allowance took into consideration, among other matters,

periodic review of the ability to collect loans in light of historical experience, the

 

nature and volume of the loan portfolio, adverse situations

that may affect the borrower’s ability to repay,

 

estimated value of any underlying collateral and prevailing economic conditions.

 

Under the prior incurred loss methodology,

 

the Company routinely evaluated adversely risk-rated credits for impairment.

Impairment, if any, was typically

 

measured for each loan by either (i) the present value of the loan’s

 

expected future cash flows discounted at

the loan’s effective

 

interest rate, (ii) the loan’s obtainable market

 

price or (iii) the estimated fair value of the collateral, if the loan was

collateral dependent. General allowances were established for

 

loans with similar characteristics. In this process, general allowance factors

were based on an analysis of historical loss experience and expected loss given default

 

derived from the Company’s internal risk

 

rating

process.

 

Other adjustments may have been made after assessing internal or external

 

influences on credit quality that were not fully reflected

in the historical loss or risk rating data. To

 

the extent that the data supporting such factors had limitations, management’s

 

judgment and

experience played a key role in determining the allowance estimates.

Premises and Equipment -

With the exception of premises and equipment acquired through business combinations,

 

which are

initially measured and recorded at fair value, depreciable assets are stated at cost less accumulated

 

depreciation. Depreciation is charged to

expense using the straight-line method over the estimated useful lives of

 

the assets. Leasehold improvements are capitalized and depreciated

using the straight-line method over the terms of the respective leases or the estimated

 

useful lives of the improvements, whichever is shorter.

Expected terms include lease option periods to the extent that the exercise of

 

such options is reasonably assured. The Company generally

assigns depreciable lives of

35

 

to

40

 

years for buildings and improvements,

5

 

to

7

 

years for furniture and fixtures and

3

 

to

5

 

years for

equipment. The Company reviews premises and equipment whenever events or

 

changes in circumstances indicate that the carrying amount

of the asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future net cash flows expected

 

to

result from the use of the asset and its eventual disposal is less than its carrying amount.

 

Restricted Equity Securities -

Restricted equity securities include investments in FHLB Topeka and Bankers’ Bank of Kansas.

FHLB Topeka is a Federal Home Loan Bank and its stock is a required investment for

 

institutions that are members of the Federal Home

Loan System. The required investment in the common stock is based on a predetermined formula. The

 

Bankers’ Bank of Kansas is a

correspondent bank located in Wichita, Kansas and the investment is carried at cost and evaluated

 

for impairment.

Bank-Owned Life Insurance -

The Company has purchased life insurance policies on certain key

 

employees that are accounted for

under the fair value method. Bank-owned life insurance is recorded at the amount

 

that can be realized under the insurance contract at the

statement of financial condition date, which is the cash surrender value.

 

Changes in cash surrender value are recorded in earnings in the

period in which the changes occur.

Foreclosed Assets Held-for-Sale -

Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and

 

are initially recorded

at fair value less cost to sell at the date of foreclosure, establishing a new cost

 

basis. Subsequent to foreclosure, valuations are periodically

performed by management and the assets are carried at the lower of carrying amount

 

or fair value less cost to sell. Revenue and expenses

from operations and changes in the valuation allowance are included in net income or expenses

 

from foreclosed assets.

Goodwill and intangible assets, net -

Goodwill is established and recorded if the consideration given during an acquisition

transaction exceeds the fair value of the net assets received. Goodwill has an

 

indefinite useful life and is not amortized, but is evaluated

annually for potential impairment, or when events or circumstances indicate

 

that it is more likely than not that the fair value of the reporting

unit is less than its carrying amount. A qualitative assessment is performed to determine whether the existence of events or circumstances led

to a determination that it was more likely than not the fair value was less than the carrying

 

amount, including goodwill. If, based on the

evaluation, it is determined to be more likely than not that the fair value

 

was less than the carrying value, then goodwill is tested further for

impairment. If the implied fair value of goodwill is lower than its carrying

 

amount, a goodwill impairment would be indicated and goodwill

written down

 

to its implied fair value.

Intangible assets that have finite useful lives, such as core deposit intangibles,

 

are amortized over their estimated useful lives. The

Company’s core deposit intangible assets represent the value of the anticipated

 

future cost savings that will result from the acquired core

deposit relationships versus an alternative source of funding. Judgment

 

may be used in assessing goodwill and intangible assets for

impairment. Estimates of fair value are based on projections of revenues,

 

operating costs and cash flows of the reporting unit considering

historical and anticipated future results, general economic and market

 

conditions, as well as the impact of planned business or operational

strategies. The valuations use a combination of present value techniques

 

to measure fair value considering market factors. Additionally,

judgment is used in determining the useful lives of finite-lived intangible

 

assets. Adverse changes in the economic environment, operations

of the reporting unit, or changes in judgments and projections could result

 

in a significantly different estimate of the fair value of the

reporting unit and could result in an impairment of goodwill and/or intangible

 

assets.

 

 

 

 

 

 

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66

Related Party Transactions - The Company extends credit and receives deposits from related parties. In

 

management’s opinion, the

loans and deposits were made in the ordinary course of business and made

 

on similar terms as those prevailing at the time with other persons.

Related party loans totaled $

7

 

million and $

8

 

million at December 31, 2022 and 2021, respectively. Related party deposits totaled

$

91

 

million and $

74

 

million at December 31, 2022 and 2021, respectively.

Stock-Based Compensation - The Company accounts for all stock-based compensation

 

transactions in accordance with Accounting

Standard Codification (“ASC”) 718, Compensation - Stock Compensation,

 

which requires that stock compensation transactions be

recognized as compensation expense in the consolidated statements of operations

 

based on their fair values on the measurement date. The

Company recognizes forfeitures as they occur. New shares are issued upon exercise

 

of an award. The Company records permanent tax

differences through the income tax provision upon vesting or exercise

 

of a stock-based award. The various stock-based compensation plans

are described more fully in

Note 17: Stock-Based Compensation

.

Transfers of Financial Assets - Transfers of financial assets are accounted for as sales when control over the assets has been

surrendered. Control over transferred assets is deemed to be surrendered

 

when: (i) the assets have been isolated from the Company and put

presumptively beyond the reach of the transferor and its creditors, even

 

in bankruptcy or other receivership; (ii) the transferee obtains the

right (free of conditions that constrain it from taking advantage of that right)

 

to pledge or exchange the transferred assets; and (iii) the

Company does not maintain effective control over the transferred

 

assets through an agreement to repurchase them before their maturity or the

ability to unilaterally cause the holder to return specific assets.

Income Taxes - The Company and its subsidiaries file U.S. federal and certain state income tax

 

returns on a consolidated basis.

Additionally,

 

the Company and its subsidiaries file separate state income tax returns with various

 

state jurisdictions. The provision for

income taxes includes the income tax balances of the Company and all of

 

its subsidiaries.

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. The income tax accounting guidance results

in two components of income tax expense: (i) current; and (ii) deferred. Current

 

income tax expense reflects taxes to be paid or refunded for

the current period by applying the provisions of the enacted tax law to the taxable income

 

or excess of deductions over revenues. The

Company determines deferred income taxes using the liability or balance

 

sheet method. Under this method, the net deferred tax asset or

liability is based on the tax effects of the differences between the book

 

and tax bases of assets and liabilities and enacted changes in tax rates

and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between

 

periods. Deferred tax assets are

recognized if it is more likely than not, based on the technical merits, that the tax

 

position will be realized or sustained upon examination.

The term, more likely than not, means a likelihood of more than 50 percent; the

 

terms examined and upon examination also include

resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is

initially and subsequently measured as the largest amount of tax benefit

 

that has a greater than 50 percent likelihood of being realized upon

settlement with a taxing authority that has full knowledge of all relevant information. The determination

 

of whether or not a tax position has

met the more likely than not recognition threshold considers the facts, circumstances

 

and information available at the reporting date and is

subject to management’s judgment. Deferred tax assets are reduced by

 

a valuation allowance if, based on the weight of evidence available, it

is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company recognizes interest and penalties on income taxes as a component

 

of other non-interest expense.

 

Earnings Per Share -

Basic earnings per share represent net income available to common stockholders divided

 

by the weighted

average number of common shares outstanding during each period. Diluted earnings

 

per share reflect additional potential shares that would

have been outstanding if dilutive potential common stock had been

 

issued, as well as any adjustment to income that would result from the

assumed issuance. Potential common stock that may be issued by the Company

 

is determined using the treasury stock method.

Derivative Financial Instruments -

The Company records all derivatives on the statement of financial condition

 

at fair value in

accordance with ASC 815, Derivatives and Hedging. The accounting for changes in the fair value of derivatives depends on

 

the intended use

of the derivative, whether the Company has elected to designate a derivative

 

in a hedging relationship and apply hedge accounting and

whether the hedging relationship has satisfied the criteria necessary to apply hedge

 

accounting. Derivatives designated and qualifying as a

hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment

 

attributable to a particular risk, such as interest

rate risk, are considered fair value hedges. Derivatives designated and qualifying

 

as a hedge of the exposure to variability in expected future

cash flows, or other types of forecasted transactions, are considered cash flow

 

hedges. Hedge accounting generally provides for the matching

of the timing of gain or loss recognition on the hedging instrument with the recognition

 

of the changes in the fair value of the hedged asset or

liability that are attributable to the hedged risk in a fair value hedge or the

 

earnings effect of the hedged forecasted transactions in a cash flow

hedge.

In accordance with the Financial Accounting Standards Board's (“FASB”) fair value measurement guidance in ASU 2011-04, the

Company made an accounting policy election to measure the credit risk

 

of its derivative financial instruments that are subject to master

netting agreements on a net basis by counter-party portfolio.

 

 

 

 

 

 

 

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67

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.

Acquisition Activities - The Company accounts for business combinations under the acquisition method of accounting. Assets

acquired and liabilities assumed are measured and recorded at fair value

 

at the date of acquisition, including identifiable intangible assets. If

the fair value of net assets acquired exceeds the fair value of consideration

 

paid, a bargain purchase gain is recognized at the date of

acquisition. Conversely, if the consideration paid exceeds the fair

 

value of the net assets acquired, goodwill is recognized at the acquisition

date. Fair values are subject to refinement for up to a maximum of one year

 

after the closing date of an acquisition as information relative to

closing date fair values becomes available. Adjustments recorded to the acquired assets and liabilities assumed

 

are applied prospectively in

accordance with ASC Topic 805. The determination of the fair value of loans acquired takes into account credit quality deterioration

 

and

probability of loss; therefore, the related ACL is not carried forward at the time of acquisition. Identifiable intangible assets are recognized

separately if they arise from contractual or other legal rights or if they are separable

 

(i.e., capable of being sold, transferred, licensed, rented,

or exchanged separately from the entity). Deposit liabilities and the

 

related depositor relationship intangible assets, known as the core deposit

intangible assets, may be exchanged in observable exchange transactions. As a result, the core deposit intangible asset is considered

identifiable, because the separability criterion has been met.

Treasury Stock - When the Company acquires treasury stock, the sum of the consideration

 

paid and direct transaction costs after tax

is recognized as a deduction from equity. The cost basis for the reissuance of treasury

 

stock is determined

 

using a first-in, first-out basis. To

the extent that the reissuance price is more than the cost basis (gain), the excess is recorded

 

as an increase to additional paid-in capital in the

consolidated statements of financial condition. If the reissuance price

 

is less than the cost basis (loss), the difference is recorded to additional

paid-in capital to the extent there is a cumulative treasury stock paid-in capital

 

balance. Any loss in excess of the cumulative treasury stock

paid-in capital balance is charged to retained earnings.

Operating Segments - An operating segment is a component of an entity that has separate financial information related

 

to its

business activities and is reviewed by the chief operating decision maker

 

on a regular basis to allocate resources and assess performance. The

Company identifies the following markets as operating segments: (i) Kansas City, Missouri

 

and Leawood, Kansas; (ii) Wichita, Kansas; (iii)

Oklahoma City, Oklahoma; (iv) Tulsa, Oklahoma; (v) Energy; (vi) Dallas and Frisco, Texas; (vii) Phoenix, Arizona; (viii) Franchise Finance;

(ix) Financial Institutions; (x) Colorado Springs, Colorado; (xi) Denver,

 

Colorado; (xii) New Mexico; (xiii) Small Business Administration

(“SBA”); (xiv) Residential Mortgage; and (xv) Sponsor Finance. These markets

 

provide similar products and services using a similar process

to a similar customer base. Our products and services include, but are not limited

 

to, loans; checking and savings accounts; time deposits and

credit cards. Loan products include commercial, real estate, consumer, and

 

SBA loans. The regulatory environment is the same for the

markets as well. The chief operating decision maker monitors the revenue and

 

costs of the markets; however, operations are managed,

including allocation of resources, and financial performance is evaluated

 

on a Company-wide basis. As a result, the markets are aggregated

into

one

 

reportable segment.

Recent Accounting Pronouncements

The following ASUs represent changes to current accounting guidance that will be adopted in future years:

 

ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled

 

Debt Restructurings and Vintage Disclosures

Background

 

– ASU 2022-02 provides new guidance on (i) troubled debt restructurings (“TDRs”) and (ii) vintage disclosures

 

for

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. For the Company, the

 

amendments are effective as of January 1, 2023.

Impact of adoption

 

– The Company expects to adopt the provisions of this guidance as of January 1, 2023. We have concluded

 

that

the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures

 

.

 

The following ASUs represent changes to current accounting guidance that were adopted in the current year:

 

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement

 

of Credit Losses on Financial Instruments:

Background

 

– ASU 2016-13 and its subsequent amendments provide new guidance on the impairment model for financial assets

measured at amortized cost, including loans held-for-investment and

 

off-balance sheet credit exposures. The 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 AFS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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68

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.

 

Impact of adoption

 

– The Company adopted ASU 2016-13 on January 1, 2022 using the modified retrospective approach. All

disclosures as of December 31, 2022 are presented in accordance with Topic 326. The Company

 

did not recast comparative financial

periods and has presented those disclosures under previously applicable GAAP. The Company

 

used the prospective transition

approach for AFS securities for which other-than-temporary-impairment has been recognized prior to January

 

1, 2022. As a result,

the amortized cost basis remains the same before and after the effective date of ASU 2016-13.

The following table illustrates the impact of adopting ASU 2016-13 and details how outstanding loan balances have been

reclassified because of changes made to the Company’s loan segments under

 

CECL:

January 1, 2022

As Reported under ASU

2016-13

Pre-ASU 2016-13

Impact of ASU 2016-13

Adoption

(Dollars in thousands)

Assets:

Loans (outstanding balance)

Commercial and industrial

$

843,024

$

1,401,681

$

(558,657)

Commercial and industrial lines of credit

617,398

-

617,398

Energy

278,579

278,860

(281)

Commercial real estate

1,278,479

1,281,095

(2,616)

Construction and land development

574,852

578,758

(3,906)

Residential real estate

360,046

600,816

(240,770)

Multifamily real estate

240,230

-

240,230

PPP

-

64,805

(64,805)

Consumer

63,605

63,605

-

Gross Loans

4,256,213

4,269,620

(13,407)

Net deferred loan fees and costs

-

13,407

(13,407)

Allowance for credit losses on loans

56,628

58,375

(1,747)

Loans, net of the allowance for credit losses

4,199,585

4,197,838

1,747

Deferred tax asset

$

15,301

$

14,474

$

827

Liabilities

Allowance for credit losses on off-balance sheet

exposures

$

5,184

$

-

$

5,184

Stockholders' equity

Retained earnings

$

144,489

$

147,099

$

(2,610)

In connection with adoption of ASU 2016-13, changes were made to the Company’s loan segments to align with the methodology

applied in determining the allowance under CECL. The commercial and industrial loan portfolio

 

was separated into term loans and

lines of credit. In addition, the remaining Paycheck Protection Program

 

(“PPP”) loans were consolidated into the commercial and

industrial term loan segment due to their declining outstanding balance. The Company

 

also separated the residential and multifamily

real estate loan segments. Refer to

Note 4: Loans and Allowance for Credit Losses

 

for detail on the loan segments.

 

ASU 2016-02, Leases (Topic 842):

 

Background

 

– In February 2016, the FASB issued ASU 2016-02, Leases. The guidance in ASU 2016-02 supersedes the lease

recognition requirements in ASC Topic 840, Leases. The new standard established a right-of-use (“ROU”) model that requires a

lessee to record a ROU asset and lease liability on the statement of financial

 

condition for all leases with terms longer than 12

months. Leases are classified as either finance or operating, with classification

 

affecting the pattern of expense recognition in the

consolidated statements

 

of operations.

 

Impact of Adoption

 

– The Company adopted ASU 2016-02 on January 1, 2022. In July 2018, the FASB issued ASU 2018-11

which, among other things, provided an additional transition method

 

that allows entities to not apply the guidance in ASU 2016-02

in the comparative periods presented in the financial statements and instead

 

recognize a cumulative-effect adjustment to the opening

balance of retained earnings in the period of adoption. The Company did not recast comparative

 

financial periods and has presented

those disclosures under previously applicable GAAP.

 

We also elected to apply certain practical expedients provided under ASU

2016-02 whereby we combine lease and non-lease components and we will not

 

reassess (i) whether any expired or existing

contracts are or contain leases, (ii) the lease classification for any expired or existing

 

leases and (iii) initial direct costs for any

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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69

existing leases. We also did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related

accounting guidance).

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

$

23,589

$

-

$

23,589

Liabilities:

Lease incentive

-

2,125

(2,125)

Accrued rent payable

-

904

(904)

Lease liability

$

26,618

$

-

$

26,618

Note 2:

 

Acquisition Activities

 

On November 22, 2022, the Company completed its acquisition of Central

 

whereupon Central was merged with and into the Bank.

Pursuant to the merger agreement executed in June 2022, the Company paid $

66.2

 

million of cash consideration and assumed all of the assets

and liabilities of Central by operation of law. The acquisition added three full-service

 

branches within Colorado and New Mexico to the

Company’s footprint,

 

adds experienced leaders, in particular in the SBA and Residential Mortgage lending areas, and accelerates our growth

strategy.

Central acquisition-related costs totaled $

8.3

 

million for the year ended December 31, 2022, including a Day 1 CECL provision

expense of $

4.4

 

million, which were included in the Company’s consolidated statements of operations. The

 

results of Central are included in

the results of the Company subsequent to the acquisition date and reported

 

in this annual report on Form 10-K.

 

The Company determined that the acquisition of Central constitutes a business combination

 

as defined in ASC Topic 805, Business

Combinations. Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and

 

liabilities assumed at fair value.

The Company determined fair values in accordance with the guidance

 

provided in ASC Topic 820, Fair Value Measurements and

Disclosures. In many cases, the determination of these fair values required

 

management to make estimates about discount rates, future

expected cash flows, market conditions and other future events that are highly

 

subjective in nature and subject to change. Actual results could

differ materially. The Company has made the determination of fair values using

 

the best information available at the time; however, purchase

accounting is not complete and the assumptions used are subject to change and, if changed,

 

could have a material effect on the Company's

financial position and results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

70

The table below summarizes preliminary net assets acquired (at fair value)

 

and consideration transferred in connection with the

Central acquisition:

November 22, 2022

(Dollars in thousands)

Assets:

Cash and cash equivalents

$

191,916

Available-for-sale securities

41,103

Loans, net of unearned fees

388,531

Premises and equipment

2,270

Restricted equity securities

1,087

Interest receivable

2,514

Foreclosed assets held for sale

158

Core deposit intangible

16,465

Other

4,231

Total assets acquired

648,275

Liabilities:

 

Total deposits

570,275

Federal Home Loan Bank advances

10,559

Other borrowings

10,901

Interest payable and other liabilities

3,209

Total liabilities assumed

594,944

Identifiable net assets acquired

$

53,331

Consideration:

Cash

66,167

Goodwill

$

12,836

In connection with the Central acquisition, the Company recorded $

12.8

 

million of goodwill, which is deductible for tax purposes.

The amount of goodwill recorded reflects the expanded market presence,

 

synergies and operational efficiencies that are expected to result

from the acquisition. The following is a description of the methods used to determine

 

the fair values of significant assets and liabilities

presented above:

Cash and cash equivalents

—The carrying amount of these assets was deemed a reasonable estimate of fair

 

value based on the short-

term nature of these assets.

Loans, net

—The fair value of loans was based on a discounted cash flow methodology.

 

Inputs and assumptions used in the fair

value estimate of the loan portfolio, includes interest rate, servicing, credit and liquidity

 

risk, and required equity return. The fair value of

loans was calculated using a discounted cash flow analysis based on the remaining

 

maturity and repricing terms. Cash flows were adjusted

by estimating future credit losses and the rate of prepayments. Projected monthly

 

cash flows were then discounted to present value using a

risk-adjusted market rate for similar loans.

 

Core deposit intangibles

—The Company identified customer relationships, in the form of core deposit intangibles,

 

as an identified

intangible asset. Core deposit intangibles derive value from

 

the expected future benefits or earnings capacity attributable to the acquired core

deposits. The core deposit intangible was valued by identifying the expected future

 

benefits of the core deposits and discounting those

benefits back to present value. The core deposit intangible will be amortized over

 

its estimated useful life of approximately

10

 

years using

the sum of the years digits accelerated method.

Deposits

—By definition, the fair value of demand and saving deposits equals the

 

amount payable. For time deposits acquired, the

Company utilized an income approach, discounting the contractual cash flows

 

on the instruments over their remaining contractual lives at

prevailing market rates.

 

FHLB Advances

 

- FHLB advances are recorded at their fair value as estimated by discounting the contractual future cash flows using

FHLB rates offered on similar maturities as of the acquisition date.

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

71

The fair value of the acquired assets and liabilities noted in the table may change during

 

the provisional period, which may last up to

twelve months subsequent to the acquisition date. The Company may obtain additional

 

information to refine the valuation of the acquired

assets and liabilities and adjust the recorded fair value.

Accounting for acquired loans

Loans acquired are recorded at fair value with no carryover of the related allowance

 

for credit losses. Purchased-credit deteriorated

loans (“PCD”) are loans that have experienced more than insignificant

 

credit deterioration since origination and are recorded at the purchase

price. Management determined that any loans which were past due, adversely risk

 

rated, on non-accrual or considered a troubled debt

restructured loan were PCD loans. The allowance for credit losses is determined on a collective

 

basis and is allocated to the individual loans.

The sum of the loan’s purchase price and the allowance for credit losses becomes its initial

 

amortized cost basis. The difference between the

initial amortized cost basis and the par value of the loan is a noncredit discount

 

or premium, which is amortized into interest income over the

life of the loan.

 

Non-PCD loans have not experienced a more than insignificant deterioration

 

in credit quality since origination. The difference

between the fair value and outstanding balance of the non-PCD loans is recognized

 

as an adjustment to interest income over the lives of the

loan.

A Day 1 CECL allowance for credit losses on the non-PCD loans was recorded through provision for credit loss expense within the

consolidated statements of operations. At the date of acquisition, of the $

388.5

 

million of loans acquired from Central, $

20.5

 

million, or

5

%

of Central’s loan portfolio, were accounted for as PCD loans.

 

The following table provides a summary of PCD loans purchased as part

 

of the Central acquisition as of the acquisition date:

Total

(Dollars in thousands)

Unpaid principal balance

$

22,005

PCD allowance for credit loss at acquisition

(916)

(Discount) premium on acquired loans

(566)

Purchase price of PCD loans

$

20,523

Pro forma information

The following table presents unaudited pro-forma information as if the acquisition

 

of Central had occurred on January 1, 2021.

 

This

pro forma information gives effect to certain adjustments, including

 

purchase accounting fair value adjustments, amortization of core deposit

intangible and related income tax effects and is based on our historical results for the

 

periods presented. The Day 1 CECL provision of $

4.4

million is included in the 2021 pro forma results. Transaction-related costs related to

 

each acquisition are not reflected in the pro forma

amounts. The pro forma information does not necessarily reflect the results of operations

 

that would have occurred had the Company

acquired Central at the beginning of fiscal year 2021. Cost savings are also

 

not reflected in the unaudited pro forma amounts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

72

The pro forma information is theoretical in nature and not necessarily indicative of

 

future consolidated results of operations of the

Company or the consolidated results of operations which would have resulted

 

had the Company acquired Central during the periods

presented.

Pro forma for Years Ended December 31,

Actual from

Acquisition Date

through

December 31, 2022

2022

2021

(Dollars in thousands, except share and per share data)

Net interest income

$

1,906

$

209,957

$

186,824

Non-interest income

142

26,193

23,225

Net income

261

68,846

71,689

Pro-forma earnings per share:

Basic

$

1.39

$

1.40

Diluted

1.38

1.38

Weighted average shares outstanding:

49,489,860

51,291,428

Basic

50,002,054

52,030,582

Diluted

Note 3:

 

Securities

Available-for-Sale 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:

December 31, 2022

Amortized Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Approximate

Fair Value

(Dollars in thousands)

Mortgage-backed - GSE residential

$

197,243

$

232

$

25,166

$

172,309

Collateralized mortgage obligations - GSE residential

11,629

—

743

10,886

State and political subdivisions

551,007

929

57,440

494,496

Corporate bonds

9,762

—

552

9,210

Total available-for-sale securities

$

769,641

$

1,161

$

83,901

$

686,901

December 31, 2021

Amortized Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Approximate

Fair Value

(Dollars in thousands)

Mortgage-backed - GSE residential

$

161,675

$

1,809

$

1,774

$

161,710

Collateralized mortgage obligations - GSE residential

18,130

311

10

18,431

State and political subdivisions

532,906

29,329

767

561,468

Corporate bonds

4,241

119

—

4,360

Total available-for-sale securities

$

716,952

$

31,568

$

2,551

$

745,969

The carrying value of securities pledged as collateral was $

22

 

million and $

0

 

at December 31, 2022 and 2021, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

73

The following table summarizes the gross realized gains and losses from sales or maturities

 

of AFS securities:

For the Year Ended December 31, 2022

Gross Realized Gains

Gross Realized Losses

Net Realized Gain

(Dollars in thousands)

Available-for-sale securities

$

146

$

50

$

96

For the Year Ended December 31, 2021

Gross Realized Gains

(1)

Gross Realized Losses

Net Realized Gain

(Dollars in thousands)

Available-for-sale securities

$

1,157

$

134

$

1,023

(1)

Included $

75

 

thousand related to a previously disclosed OTTI municipal security that was settled in 2020.

The following table shows available-for-sale securities gross unrealized losses, the

 

number of securities that are in an unrealized

loss position, and fair value of the Company’s investments with unrealized

 

losses, aggregated by investment class and length of time that

individual securities have been in a continuous unrealized loss position at

 

December 31, 2022 and 2021:

December 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

$

91,929

$

10,410

41

$

66,036

$

14,756

16

$

157,965

$

25,166

57

Collateralized mortgage obligations -

GSE residential

10,636

733

18

251

10

1

10,887

743

19

State and political subdivisions

350,884

36,697

266

52,519

20,743

40

403,403

57,440

306

Corporate bonds

9,210

552

5

—

—

—

9,210

552

5

Total temporarily impaired AFS

securities

$

462,659

$

48,392

330

$

118,806

$

35,509

57

$

581,465

$

83,901

387

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

$

87,306

$

1,774

16

$

—

$

—

—

$

87,306

$

1,774

16

Collateralized mortgage obligations -

GSE residential

803

10

2

—

—

—

803

10

2

State and political subdivisions

72,915

762

39

1,310

5

4

74,225

767

43

Corporate bonds

—

—

—

—

—

—

—

—

—

Total temporarily impaired AFS

securities

$

161,024

$

2,546

57

$

1,310

$

5

4

$

162,334

$

2,551

61

Management evaluated all of the available-for-sale securities in an unrealized

 

loss position at December 31, 2022.

 

The unrealized

losses in the Company’s investment portfolio were caused by interest rate changes. The Company

 

does not intend to sell the investments and

it is not more likely than not the Company will be required to sell the investments before recovery

 

of their amortized cost basis. The

Company recorded no credit loss impairment in 2022 and no other than temporary

 

impairment losses on AFS securities in 2021.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

74

The amortized cost, fair value, and weighted average yield of available-for-sale

 

securities by contractual maturity, are shown below:

December 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

$

—

$

18

$

105

$

197,120

$

197,243

Estimated fair value

$

—

$

17

$

101

$

172,191

$

172,309

Weighted average yield

(2)

—

%

4.77

%

4.05

%

2.39

%

2.39

%

Collateralized mortgage obligations - GSE residential

(1)

Amortized cost

$

—

$

—

$

2,344

$

9,285

$

11,629

Estimated fair value

$

—

$

—

$

2,229

$

8,657

$

10,886

Weighted average yield

(2)

—

%

—

%

2.77

%

2.25

%

2.36

%

State and political subdivisions

Amortized cost

$

1,076

$

6,310

$

109,771

$

433,850

$

551,007

Estimated fair value

$

1,077

$

6,471

$

109,134

$

377,814

$

494,496

Weighted average yield

(2)

3.54

%

4.60

%

3.08

%

2.70

%

2.80

%

Corporate bonds

Amortized cost

$

—

$

150

$

9,612

$

—

$

9,762

Estimated fair value

$

—

$

146

$

9,064

$

—

$

9,210

Weighted average yield

(2)

—

%

5.43

%

5.70

%

—

%

5.70

%

Total available-for-sale securities

Amortized cost

$

1,076

$

6,478

$

121,832

$

640,255

$

769,641

Estimated fair value

$

1,077

$

6,634

$

120,528

$

558,662

$

686,901

Weighted average yield

(2)

3.54

%

4.62

%

3.28

%

2.60

%

2.74

%

(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 using a

 

30/360 day basis. Tax-exempt securities are not tax effected.

December 31, 2021

Within

After One to

After Five to

After

One Year

Five Years

Ten Years

Ten Years

Total

(Dollars in thousands)

Available-for-sale securities

Mortgage-backed - GSE residential

(1)

Amortized cost

$

—

$

30

$

148

$

161,497

$

161,675

Estimated fair value

$

—

$

31

$

156

$

161,523

$

161,710

Weighted average yield

(2)

—

%

4.67

%

4.00

%

1.62

%

1.62

%

Collateralized mortgage obligations - GSE residential

(1)

Amortized cost

$

—

$

—

$

2,421

$

15,709

$

18,130

Estimated fair value

$

—

$

—

$

2,559

$

15,872

$

18,431

Weighted average yield

(2)

—

%

—

%

2.77

%

1.61

%

1.77

%

State and political subdivisions

Amortized cost

$

741

$

4,304

$

84,230

$

443,631

$

532,906

Estimated fair value

$

746

$

4,520

$

90,645

$

465,557

$

561,468

Weighted average yield

(2)

3.49

%

4.14

%

3.29

%

2.67

%

2.78

%

Corporate bonds

Amortized cost

$

—

$

604

$

3,637

$

—

$

4,241

Estimated fair value

$

—

$

670

$

3,690

$

—

$

4,360

Weighted average yield

(2)

—

%

5.83

%

4.28

%

—

%

4.50

%

Total available-for-sale securities

Amortized cost

$

741

$

4,938

$

90,436

$

620,837

$

716,952

Estimated fair value

$

746

$

5,221

$

97,050

$

642,952

$

745,969

Weighted average yield

(2)

3.49

%

4.35

%

3.32

%

2.37

%

2.50

%

(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 using a

 

30/360 day basis. Tax-exempt securities are not tax effected.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

75

Equity Securities

Equity securities consist of $

2.9

 

million of private equity investments. Equity securities are included in other assets on the

consolidated statements of financial condition.

During 2020, the Company acquired an $

11

 

million privately-held security in partial satisfaction of debts previously contracted. The

Company used a discounted cash flow model, a market transactions model and

 

a public valuation approach to determine the security’s cost

basis. The Company elected a measurement alternative that allows the security to remain

 

at cost until an impairment is identified or an

observable price change for an identical or similar investment of the

 

same issuer occurs. Impairment is recorded when there is evidence that

the expected fair value of the investment has declined to below the recorded

 

cost. No changes to the cost basis occurred in 2020. During

2021, the Company sold the equity security for $

5

 

million that resulted in a $

6

 

million realized loss.

 

The following is a summary of the recorded fair value and the unrealized and

 

realized gains and losses recognized in net income on

equity securities:

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Net (losses) gains recognized during the reporting period on equity securities

$

(181)

$

(6,325)

$

46

Less: net losses recognized during the period on equity securities sold during

 

the

period

(181)

(6,245)

—

Unrealized (loss) gain recognized during the reporting period on

 

equity securities

still held at the reporting date

$

—

$

(80)

$

46

Note 4:

 

Loans and Allowance for Credit Losses

Categories of loans at December 31, 2022 and 2021 include:

As of December 31,

2022

2021

Amount

% of Loans

Amount

% of Loans

(Dollars in thousands)

Commercial and industrial

$

1,017,678

19

%

$

843,024

20

%

Commercial and industrial lines of credit

957,254

18

617,398

15

Energy

173,218

3

278,579

7

Commercial real estate

1,718,947

32

1,278,479

30

Construction and land development

794,788

15

574,852

14

Residential real estate

409,124

8

 

360,046

8

Multifamily real estate

237,984

4

240,230

6

Consumer

63,736

1

63,605

1

Loans, net of unearned fees

5,372,729

100

%

4,256,213

100

%

Less: Allowance for credit losses on loans

(1)

(61,775)

(58,375)

Loans, net of the allowance for credit losses on loans

$

5,310,954

$

4,197,838

(1)

As of December 31, 2021, this line represents the allowance for

 

loan and lease losses. See further discussion in

Note 1: Nature of

Operations and Summary of Significant Accounting Policies

.

Accrued interest of $

23

 

million and $

10

 

million at December 31, 2022 and December 31, 2021, respectively,

 

presented in “interest

receivable” on the consolidated statements of financial condition

 

is excluded from the amortized cost basis disclosed in the above table.

Table of Contents

76

The Company aggregates the loan portfolio by similar credit risk characteristics. The loan

 

segments are described in additional

detail below:

●

Commercial and Industrial

 

- The category includes loans to commercial and industrial customers for use in property,

plant, and equipment purchases and expansions. Loan terms typically require

 

principal and interest payments that decrease

the outstanding loan balance. Repayment is primarily from the cash flow

 

of a borrower’s principal business operation.

Credit risk is driven by creditworthiness of a borrower and the economic conditions

 

that impact the cash flow stability from

business operations.

The category also includes the remaining PPP loans outstanding. These loans were established by the

 

Coronavirus Aid,

Relief, and Economic Security Act which authorized forgivable loans to small businesses to pay their employees during

 

the

COVID-19 pandemic. The loans are

100

 

percent guaranteed by the SBA and repayment is primarily dependent on the

borrower’s cash flow or SBA repayment approval.

●

Commercial and Industrial Lines of Credit

– The category includes lines of credit to commercial and industrial

customers for working capital needs. The loan terms typically require interest-only

 

payments, mature in one year, and

require the full balance paid-off at maturity. Lines of credit allow the borrower

 

to drawdown and repay the line of credit

based on the customer’s cash flow needs. Repayment is primarily from the operating

 

cash flow of the business. Credit risk

is driven by creditworthiness of a borrower and the economic conditions that

 

impact the cash flow stability from business

operations.

●

Energy

 

- The category includes loans to oil and natural gas customers for use in financing working

 

capital needs,

exploration and production activities, and acquisitions. The loans are repaid primarily

 

from the conversion of crude oil and

natural gas to cash. Credit risk is driven by creditworthiness of a borrower and

 

the economic conditions that impact the

cash flow stability from business operations. Energy loans are typically collateralized

 

with the underlying oil and gas

reserves.

●

Commercial Real Estate

 

- The category includes loans that typically involve larger principal amounts and repayment of

these loans is generally dependent on the successful operations of the property

 

securing the loan or the business conducted

on the property securing the loan. These are viewed primarily as cash flow loans and secondarily

 

as loans secured by real

estate. Credit risk may be impacted by the creditworthiness of a borrower,

 

property values and the local economies in the

borrower’s market areas.

●

Construction and Land Development

 

- The category includes loans that are usually based upon estimates of costs and

estimated value of the completed project and include independent appraisal reviews

 

and a financial analysis of the

developers and property owners. Sources of repayment include permanent

 

loans, sales of developed property or an interim

loan commitment from the Company until permanent financing is obtained. These loans

 

are higher risk than other real

estate loans due to their ultimate repayment being sensitive to interest rate

 

changes, general economic conditions, and the

availability of long-term financing. Credit risk may be impacted by

 

the creditworthiness of a borrower, property values and

the local economies in the borrower’s market areas.

●

Residential 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.

 

 

 

Table of Contents

77

●

Consumer

- The category includes revolving lines of credit and various term loans such as automobile

 

loans and loans for

other personal purposes. Repayment is primarily dependent on the personal

 

income and credit rating of the borrowers.

Credit risk is driven by consumer economic factors (such as unemployment

 

and general economic conditions in the

borrower’s market area) and the creditworthiness of a borrower.

Allowance for Credit Losses

The Company established a CECL committee that meets at least quarterly to oversee the ACL methodology. The committee

estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and

reasonable and supportable forecasts. The ACL represents the Company’s current estimate of lifetime credit losses inherent in the loan

portfolio at the statement of financial condition 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 -

 

When unique qualities cause a loan’s exposure to loss to be inconsistent with the

 

pool segments, the loan is

individually evaluated. Individual reserves are calculated for loans

 

that are risk-rated substandard and on non-accrual and loans that are risk-

rated doubtful or loss that are greater than a defined dollar threshold. In

 

addition, TDRs are also individually evaluated. Reserves on asset

specific loans may be based on collateral, for collateral-dependent loans, or on

 

quantitative and qualitative factors, including expected cash

flow, market sentiment, and guarantor support.

Quantitative

- The Company used the cohort method, which identifies and captures the balance of a pool of loans with similar

 

risk

characteristics as of a particular time to form a cohort. For example, the outstanding

 

commercial and industrial loans and commercial and

industrial lines of credit loan segments as of quarter-end are considered

 

cohorts. The cohort is then tracked for losses over the remaining life

of loans or until the pool is exhausted. The Company used a lookback period of approximately

 

six-years to establish the cohort population.

By using the historical data timeframe, the Company can establish a historical loss factor

 

for each of its loan segments and adjust the losses

with qualitative and forecast factors

Qualitative

 

– The Company uses qualitative factors to adjust the historical loss factors for current conditions. The Company

primarily uses the following qualitative factors:

◾

The nature and volume of changes in risk ratings;

◾

The volume and severity of past due loans;

◾

The volume of non-accrual loans;

◾

The nature and volume of the loan portfolio, including the existence, growth, and

 

effect of any concentrations of credit;

◾

Changes in the Institute of Supply Management’s Purchasing Manager Indices

 

(“PMI”) for services and manufacturing;

◾

Changes in collateral values;

 

◾

Changes in lending policies, procedures, and quality of loan reviews;

◾

Changes in lending staff; and

◾

Changes in competition, legal and regulatory environments

In addition to the current condition qualitative adjustments, the Company uses the

 

Federal Reserve’s unemployment forecast to

adjust the ACL based on forward looking guidance. The Federal Reserve’s unemployment forecast extends three-years and is eventually

reverted to the mean of six percent by year 10.

 

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

 

Table of Contents

78

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)

 

- Considered satisfactory. Includes borrowers that generally maintain good liquidity

 

and financial

condition or the credit is currently protected with sales trends remaining flat

 

or declining. Most ratios compare favorably with

industry norms and Company policies. Debt is programmed and timely

 

repayment is expected.

•

 

Special Mention (risk rating 5)

 

- Borrowers generally exhibit adverse trends in operations or an imbalanced position

 

in their

balance sheet that has not reached a point where repayment is jeopardized.

 

Credits are currently protected but, if left

uncorrected, the potential weaknesses may result in deterioration of

 

the repayment prospects for the credit or in the Company’s

credit or lien position at a future date. These credits are not adversely classified and do not expose

 

the Company to enough risk

to warrant adverse classification.

•

Substandard (risk rating 6)

 

- Credits generally exhibit well-defined weakness(es) that jeopardize repayment.

 

Credits are

inadequately protected by the current worth and paying capacity of

 

the obligor or of the collateral pledged. A distinct possibility

exists that the Company will sustain some loss if deficiencies are not corrected.

 

Loss potential, while existing in the aggregate

amount of substandard assets, does not have to exist in individual assets classified substandard.

 

Substandard loans include both

performing and non-performing loans and are broken out in the table below.

•

Doubtful (risk rating 7)

- Credits which exhibit weaknesses inherent in a substandard credit with the added

 

characteristic that

these weaknesses make collection or liquidation in full highly questionable or

 

improbable based on existing facts, conditions

and values. Because of reasonably specific pending factors, which may

 

work to the advantage and strengthening of the assets,

classification as a loss is deferred until its more exact status may be determined.

•

Loss (risk rating 8)

- Credits which are considered uncollectible or of such little value that their continuance

 

as a bankable

asset is not warranted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

79

The following tables present the credit risk profile of the Company’s loan portfolio

 

based on an internal rating category and loan

segments:

As of December 31, 2022

Amortized Cost Basis by Origination Year

 

and Internal Risk Rating

Amortized Cost Basis

2022

2021

2020

2019

2018

2017

LOC

LOC to

Term

Total

(Dollars in thousands)

Commercial and industrial

Pass

$

465,963

$

281,166

$

55,934

$

50,445

$

48,595

$

20,648

$

—

$

19,089

$

941,840

Special mention

2,531

23,055

14,573

2,951

4,947

86

—

41

48,184

Substandard - accrual

290

677

1,647

1,330

740

299

—

21,166

26,149

Substandard - non-accrual

—

104

—

6

1,383

—

—

—

1,493

Doubtful

—

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

12

—

—

12

Total

$

468,784

$

305,002

$

72,154

$

54,732

$

55,665

$

21,045

$

—

$

40,296

$

1,017,678

Commercial and industrial lines of credit

Pass

$

—

$

—

$

—

$

—

$

—

$

—

$

890,109

$

—

$

890,109

Special mention

—

—

—

—

—

—

49,861

—

49,861

Substandard - accrual

—

—

—

—

—

—

10,805

—

10,805

Substandard - non-accrual

—

—

—

—

—

—

6,479

—

6,479

Doubtful

—

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

—

Total

$

—

$

—

$

—

$

—

$

—

$

—

$

957,254

$

—

$

957,254

Energy

Pass

$

7,585

$

306

$

228

$

—

$

—

$

—

$

162,834

$

171

$

171,124

Special mention

—

—

—

—

—

—

—

—

—

Substandard - accrual

—

—

—

—

—

—

1,476

—

1,476

Substandard - non-accrual

—

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

618

—

618

Loss

—

—

—

—

—

—

—

—

—

Total

$

7,585

$

306

$

228

$

—

$

—

$

—

$

164,928

$

171

$

173,218

Commercial real estate

Pass

$

474,901

$

276,403

$

156,553

$

119,643

$

73,989

$

84,460

$

350,732

$

108,837

$

1,645,518

Special mention

23,223

6,603

566

1,330

6,558

4,339

2,429

12,285

57,333

Substandard - accrual

10,388

—

547

82

60

1,548

—

992

13,617

Substandard - non-accrual

—

2,479

—

—

—

—

—

—

2,479

Doubtful

—

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

—

Total

$

508,512

$

285,485

$

157,666

$

121,055

$

80,607

$

90,347

$

353,161

$

122,114

$

1,718,947

Construction and land development

Pass

$

346,429

$

266,557

$

93,229

$

19,866

$

1,497

$

9,053

$

49,500

$

—

$

786,131

Special mention

—

7,727

—

—

—

—

—

—

7,727

Substandard - accrual

157

310

463

—

—

—

—

—

930

Substandard - non-accrual

—

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

—

Total

$

346,586

$

274,594

$

93,692

$

19,866

$

1,497

$

9,053

$

49,500

$

—

$

794,788

Residential real estate

Pass

$

77,416

$

84,158

$

121,078

$

45,265

$

37,395

$

34,852

$

1,649

$

—

$

401,813

Special mention

253

3,272

187

226

—

—

—

—

3,938

Substandard - accrual

34

—

3,148

—

—

—

—

—

3,182

Substandard - non-accrual

—

—

—

—

—

—

—

191

191

Doubtful

—

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

—

Total

$

77,703

$

87,430

$

124,413

$

45,491

$

37,395

$

34,852

$

1,649

$

191

$

409,124

Multifamily real estate

Pass

$

85,785

$

26,705

$

6,915

$

11,938

$

2,491

$

726

$

86,879

$

16,509

$

237,948

Special mention

—

—

—

—

—

—

—

36

36

Substandard - accrual

—

—

—

—

—

—

—

—

—

Substandard - non-accrual

—

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

—

Total

$

85,785

$

26,705

$

6,915

$

11,938

$

2,491

$

726

$

86,879

$

16,545

$

237,984

Consumer

Pass

$

7,917

$

1,347

$

2,611

$

265

$

129

$

6

$

51,416

$

—

$

63,691

Special mention

—

—

—

—

8

—

—

—

8

Substandard - accrual

—

—

32

—

5

—

—

—

37

Substandard - non-accrual

—

—

—

—

—

—

—

—

—

Doubtful

—

—

—

—

—

—

—

—

—

Loss

—

—

—

—

—

—

—

—

—

Total

$

7,917

$

1,347

$

2,643

$

265

$

142

$

6

$

51,416

$

—

$

63,736

Total

Pass

$

1,465,996

$

936,642

$

436,548

$

247,422

$

164,096

$

149,745

$

1,593,119

$

144,606

$

5,138,174

Special mention

26,007

40,657

15,326

4,507

11,513

4,425

52,290

12,362

167,087

Substandard - accrual

10,869

987

5,837

1,412

805

1,847

12,281

22,158

56,196

Substandard - non-accrual

—

2,583

—

6

1,383

—

6,479

191

10,642

Doubtful

—

—

—

—

—

—

618

—

618

Loss

—

—

—

—

—

12

—

—

12

Total

$

1,502,872

$

980,869

$

457,711

$

253,347

$

177,797

$

156,029

$

1,664,787

$

179,317

$

5,372,729

Table of Contents

80

The following tables present the Company’s loan portfolio aging analysis of

 

the recorded investment in loans as of December 31,

2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

81

As of December 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 and industrial

30-59 days

$

20

$

4,784

$

—

$

—

$

—

$

1,049

$

—

$

—

$

5,853

60-89 days

—

55

—

—

—

—

—

430

485

Greater than 90 days

—

143

7

6

1,383

12

—

—

1,551

Total past due

20

4,982

7

6

1,383

1,061

—

430

7,889

Current

468,764

300,020

72,147

54,726

54,282

19,984

—

39,866

1,009,789

Total

$

468,784

$

305,002

$

72,154

$

54,732

$

55,665

$

21,045

$

—

$

40,296

$

1,017,678

Greater than 90 days and

accruing

$

—

$

39

$

7

$

—

$

—

$

—

$

—

$

—

$

46

Commercial and industrial

lines of credit

30-59 days

$

—

$

—

$

—

$

—

$

—

$

—

$

2,814

$

—

$

2,814

60-89 days

—

—

—

—

—

—

980

—

980

Greater than 90 days

—

—

—

—

—

—

7,063

—

7,063

Total past due

—

—

—

—

—

—

10,857

—

10,857

Current

—

—

—

—

—

—

946,397

—

946,397

Total

$

—

$

—

$

—

$

—

$

—

$

—

$

957,254

$

—

$

957,254

Greater than 90 days and

accruing

$

—

$

—

$

—

$

—

$

—

$

—

$

584

$

—

$

584

Energy

30-59 days

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

60-89 days

—

—

—

—

—

—

—

—

—

Greater than 90 days

—

—

—

—

—

—

618

—

618

Total past due

—

—

—

—

—

—

618

—

618

Current

7,585

306

228

—

—

—

164,310

171

172,600

Total

$

7,585

$

306

$

228

$

—

$

—

$

—

$

164,928

$

171

$

173,218

Greater than 90 days and

accruing

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

Commercial real estate

30-59 days

$

—

$

—

$

—

$

1,180

$

—

$

—

$

—

$

—

$

1,180

60-89 days

—

—

—

—

—

—

—

—

—

Greater than 90 days

—

—

—

—

—

—

—

—

—

Total past due

—

—

—

1,180

—

—

—

—

1,180

Current

508,512

285,485

157,666

119,875

80,607

90,347

353,161

122,114

1,717,767

Total

$

508,512

$

285,485

$

157,666

$

121,055

$

80,607

$

90,347

$

353,161

$

122,114

$

1,718,947

Greater than 90 days and

accruing

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

Construction and land

development

30-59 days

$

4,293

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

4,293

60-89 days

—

—

—

—

—

—

—

—

—

Greater than 90 days

—

—

—

—

—

—

—

—

—

Total past due

4,293

—

—

—

—

—

—

—

4,293

Current

342,293

274,594

93,692

19,866

1,497

9,053

49,500

—

790,495

Total

$

346,586

$

274,594

$

93,692

$

19,866

$

1,497

$

9,053

$

49,500

$

—

$

794,788

Greater than 90 days and

accruing

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

Residential real estate

30-59 days

$

—

$

3,867

$

—

$

10

$

—

$

—

$

—

$

—

$

3,877

60-89 days

—

—

—

—

—

—

—

—

—

Greater than 90 days

—

120

—

—

—

—

—

—

120

Total past due

—

3,987

—

10

—

—

—

—

3,997

Current

77,703

83,443

124,413

45,481

37,395

34,852

1,649

191

405,127

Total

$

77,703

$

87,430

$

124,413

$

45,491

$

37,395

$

34,852

$

1,649

$

191

$

409,124

Greater than 90 days and

accruing

$

—

$

120

$

—

$

—

$

—

$

—

$

—

$

—

$

120

Multifamily real estate

30-59 days

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

60-89 days

—

—

—

—

—

—

—

—

—

Greater than 90 days

—

—

—

—

—

—

—

—

—

Total past due

—

—

—

—

—

—

—

—

—

Current

85,785

26,705

6,915

11,938

2,491

726

86,879

16,545

237,984

Total

$

85,785

$

26,705

$

6,915

$

11,938

$

2,491

$

726

$

86,879

$

16,545

$

237,984

Greater than 90 days and

accruing

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

Consumer

30-59 days

$

—

$

—

$

—

$

—

$

—

$

—

$

30

$

—

$

30

60-89 days

—

—

2

—

5

—

—

—

7

Greater than 90 days

—

—

—

—

—

—

—

—

—

Total past due

—

—

2

—

5

—

30

—

37

Current

7,917

1,347

2,641

265

137

6

51,386

—

63,699

Total

$

7,917

$

1,347

$

2,643

$

265

$

142

$

6

$

51,416

$

—

$

63,736

Greater than 90 days and

accruing

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

82

As of December 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

Total

30-59 days

$

4,313

$

8,651

$

—

$

1,190

$

—

$

1,049

$

2,844

$

—

$

18,047

60-89 days

—

55

2

—

5

—

980

430

1,472

Greater than 90 days

—

263

7

6

1,383

12

7,681

—

9,352

Total past due

4,313

8,969

9

1,196

1,388

1,061

11,505

430

28,871

Current

1,498,559

971,900

457,702

252,151

176,409

154,968

1,653,282

178,887

5,343,858

Total

$

1,502,872

$

980,869

$

457,711

$

253,347

$

177,797

$

156,029

$

1,664,787

$

179,317

$

5,372,729

Greater than 90 days and

accruing

$

—

$

159

$

7

$

—

$

—

$

—

$

584

$

—

$

750

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 at

December 31, 2022:

 

As of December 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 Non-

accrual Loans

Non-accrual

Loans with no

related

Allowance

(Dollars in thousands)

Commercial and

industrial

$

—

$

104

$

—

$

6

$

1,383

$

12

$

—

$

—

$

1,505

$

1,505

Commercial and

industrial lines of

credit

—

—

—

—

—

—

6,479

—

6,479

6,479

Energy

—

—

—

—

—

—

618

—

618

618

Commercial real

estate

—

2,479

—

—

—

—

—

—

2,479

2,479

Construction and land

development

—

—

—

—

—

—

—

—

—

—

Residential real estate

—

—

—

—

—

—

—

191

191

191

Multifamily real estate

—

—

—

—

—

—

—

—

—

—

Consumer

—

—

—

—

—

—

—

—

—

—

Total

$

—

$

2,583

$

—

$

6

$

1,383

$

12

$

7,097

$

191

$

11,272

$

11,272

Interest income recognized on non-accrual loans was $

1.5

 

million for the year ended December 31, 2022.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

83

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 year ended December 31, 2022:

For the Year Ended

 

December 31, 2022

Commercial

and

industrial

(1)

Commercial

and

Industrial

Lines of

Credit

(1)

Energy

Commercial

Real Estate

Construction and

Land Development

Residential Real

Estate

(2)

Multifamily

Real Estate

(2)

Consumer

Total

(Dollars in thousands)

Allowance for Credit Losses:

Beginning balance, prior to adoption of

ASU 2016-13

$

20,352

$

—

$

9,229

$

19,119

$

3,749

$

5,598

$

—

$

328

$

58,375

Impact of ASU 2016-13 adoption

(10,213)

8,866

(39)

(186)

(83)

(2,552)

2,465

(5)

(1,747)

PCD allowance for credit loss at

acquisition

394

129

—

285

98

4

—

6

916

Charge-offs

(791)

(3,971)

(4,651)

(1,102)

—

(217)

—

(13)

(10,745)

Recoveries

899

1,730

2,008

2,334

—

—

—

8

6,979

Provision (release)

1,105

6,461

(2,151)

(3,230)

1,263

166

(228)

15

3,401

Day 1 CECL provision expense

526

1,316

—

2,284

310

111

16

33

4,596

Ending balance

$

12,272

$

14,531

$

4,396

$

19,504

$

5,337

$

3,110

$

2,253

$

372

$

61,775

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

107

44

265

711

3,914

5

137

1

5,184

Provision (release)

43

8

522

(34)

2,632

(3)

(123)

2

3,047

Day 1 CECL provision expense

95

22

—

23

284

33

—

—

457

Ending balance

$

245

$

74

$

787

$

700

$

6,830

$

35

$

14

$

3

$

8,688

(1)

 

Prior to the adoption of ASU 2016-13, the Commercial and Industrial

 

lines of credit were consolidated under the Commercial and

 

Industrial segment.

(2)

 

Prior to the adoption of ASU 2016-13, the Residential Real

 

Estate and Multifamily Real Estate segments were consolidated under the

 

Residential and Multifamily Real Estate segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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84

Credit quality indicators improved meaningfully during 2022 which influenced

 

the level of qualitative factors management applied

to the ACL estimate.

 

Other considerations for the ACL as of December 31, 2022 included the strong loan growth, particularly in commercial

and industrial and commercial and industrial line of credit loans.

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

 

December 31, 2022:

As of December 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 and industrial

All business assets

$

1,489

$

—

$

1,489

Commercial and industrial lines of credit

All business assets

6,492

—

6,492

Energy

Oil and natural gas properties

618

—

618

Commercial real estate

Commercial real estate properties

92

—

92

Residential real estate

Residential real estate properties

—

—

—

Multifamily real estate

Multifamily real estate properties

—

—

—

Consumer

Vehicles & other personal assets

39

22

—

$

8,728

$

22

$

8,689

Troubled Debt Restructurings

TDRs are those extended to borrowers who are experiencing financial

 

difficulty and who have been granted a concession, excluding

loan modifications as a result of the COVID-19 pandemic. The modification

 

of terms typically includes the extension of maturity, reduction

or deferment of monthly payment, or reduction of the stated interest rate.

 

For the years ended December 31, 2022 and 2021,

no

 

loans and $

4.8

 

million in loans, respectively, were restructured under the TDR

guidance. The outstanding balance of TDRs was $

30.5

 

million and $

40.4

 

million as of December 31, 2022 and 2021, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

85

Disclosures under Previously Applicable

 

GAAP

The following disclosures are presented under previously applicable GAAP. The description

 

of the general characteristics of the

loan rating categories is as described above. The following table presents the credit

 

risk profile of the Company’s loan portfolio based on an

internal rating category and portfolio segment as of December 31, 2021:

As of December 31, 2021

Pass

Special

Mention

Substandard

Performing

Substandard

 

Non-

performing

Doubtful

Loss

Total

(Dollars in thousands)

Commercial

$

1,356,883

$

16,201

$

23,739

$

4,858

$

—

$

—

$

1,401,681

Energy

184,269

73,196

5,246

13,595

2,554

—

278,860

Commercial real estate

1,172,323

86,768

11,782

10,222

—

—

1,281,095

Construction and land development

578,758

—

—

—

—

—

578,758

Residential and multifamily real

estate

593,847

257

6,508

204

—

—

600,816

PPP

64,805

—

—

—

—

—

64,805

Consumer

63,605

—

—

—

—

—

63,605

Total

$

4,014,490

$

176,422

$

47,275

$

28,879

$

2,554

$

—

$

4,269,620

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

$

183

$

499

$

1,037

$

1,719

$

1,399,962

$

1,401,681

$

90

Energy

—

—

4,644

4,644

274,216

278,860

—

Commercial real estate

85

992

—

1,077

1,280,018

1,281,095

—

Construction and land development

966

117

—

1,083

577,675

578,758

—

Residential and multifamily real

estate

437

151

—

588

600,228

600,816

—

PPP

—

—

—

—

64,805

64,805

—

Consumer

—

99

—

99

63,506

63,605

—

Total

$

1,671

$

1,858

$

5,681

$

9,210

$

4,260,410

$

4,269,620

$

90

The following table presents the Company’s

 

loans on non-accrual as of December 31, 2021:

As of December 31,

(Dollars in thousands)

Commercial

 

$

4,858

Energy

16,148

Commercial real estate

 

10,222

Construction and land development

—

Residential and multifamily real estate

 

204

PPP

—

Consumer

 

—

Total non-accrual loans

$

31,432

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

86

The following table presents the allowance for loan losses by portfolio segment

 

and disaggregated based on the Company’s

impairment methodology:

As of or For the Year

 

Ended 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

$

333

$

2,100

$

3,164

$

—

$

—

$

—

$

—

$

5,597

Collectively evaluated for

impairment

$

20,019

$

7,129

$

15,955

$

3,749

$

5,598

$

—

$

328

$

52,778

Ending balance

$

20,352

$

9,229

$

19,119

$

3,749

$

5,598

$

—

$

328

$

58,375

Allocated to loans:

Individually evaluated for

impairment

$

5,739

$

16,204

$

31,597

$

—

$

3,387

$

—

$

—

$

56,927

Collectively evaluated for

impairment

$

1,395,942

$

262,656

$

1,249,498

$

578,758

$

597,429

$

64,805

$

63,605

$

4,212,693

Ending balance

$

1,401,681

$

278,860

$

1,281,095

$

578,758

$

600,816

$

64,805

$

63,605

$

4,269,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

87

A loan is considered impaired when based on current information and

 

events, it is probable the Company will be unable to collect

all amounts due from the borrower in accordance with the contractual terms

 

of the loan. Impaired loans include non-performing loans but

also include loans modified in TDRs where concessions have been granted

 

to borrowers experiencing financial difficulties. The intent of

concessions is to maximize collection. The following table presents loans individually

 

evaluated for impairment:

As of or For the Year Ended December 31, 2021

Recorded

Balance

Unpaid

Principal

Balance

Specific

Allowance

Average

Investment

Impaired

Loans

Interest

Income

Recognized

(Dollars in thousands)

Loans without a specific valuation

Commercial

$

4,659

$

4,740

$

—

$

7,155

$

75

Energy

3,509

7,322

—

4,548

5

Commercial real estate

1,729

1,729

—

1,800

18

Construction and land development

—

—

—

—

—

Residential and multifamily real estate

3,387

3,387

—

3,392

86

PPP

—

—

—

—

—

Consumer

—

—

—

—

—

Loans with a specific valuation

 

 

 

Commercial

1,080

1,080

333

496

19

Energy

12,695

17,977

2,100

14,117

14

Commercial real estate

29,868

30,854

3,164

28,876

993

Construction and land development

—

—

—

—

—

Residential and multifamily real estate

—

—

—

—

—

PPP

—

—

—

—

—

Consumer

—

—

—

—

—

Total

 

 

 

Commercial

5,739

5,820

333

7,651

94

Energy

16,204

25,299

2,100

18,665

19

Commercial real estate

31,597

32,583

3,164

30,676

1,011

Construction and land development

—

—

—

—

—

Residential and multifamily real estate

3,387

3,387

—

3,392

86

PPP

—

—

—

—

—

Consumer

—

—

—

—

—

$

56,927

$

67,089

$

5,597

$

60,384

$

1,210

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company estimates expected credit losses for off-balance sheet credit

 

exposures unless the obligation is unconditionally

cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate is

calculated for each loan segment and includes consideration of the likelihood

 

that funding will occur and an estimate of the expected credit

losses on commitments expected to be funded over its estimated life. For

 

each pool of contractual obligations expected to be funded, the

Company uses the reserve rate established for the related loan pools. The $

9

 

million allowance for credit losses on off-balance sheet credit

exposures

 

at December 31, 2022 is included in “interest payable and other liabilities” on

 

the statement of financial condition.

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

88

Note 5:

 

Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

As of December 31,

2022

2021

(Dollars in thousands)

Land

$

7,579

$

7,384

Building and improvements

65,101

62,344

Furniture and fixtures

14,523

14,106

Equipment

10,066

9,596

Construction in progress

1,172

509

Premises and equipment

98,441

93,939

Less: accumulated depreciation

32,457

27,870

Premises and equipment, net

$

65,984

$

66,069

The Company recorded $

4.7

 

million, $

4.9

 

million and $

4.9

 

million of depreciation expense during 2022, 2021 and 2020,

respectively, as a component of other non-interest expense in the consolidated

 

statements of operations.

Note 6:

 

Leases

The Company’s leases primarily include bank branches located in

 

Kansas City, Missouri; Tulsa, Oklahoma; Dallas, Texas; Frisco

Texas; and Phoenix, Arizona. The Company also acquired several additional leased locations in connection

 

with the Central acquisition in

Denver and Colorado Springs, Colorado. The remaining terms on these branch

 

leases range from less than

one year

 

to

twenty years

 

with

certain options to renew. Renewal terms can extend the lease term between

five years

 

and

twenty years

. 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 December 31, 2022, the

 

Company recognized one

finance lease and the remaining Company leases are classified as operating leases.

The ROU asset is included in “Other assets” on the consolidated statement of

 

financial condition, and was $

30.5

 

million at

December 31, 2022. Certain adjustments to the ROU asset may be

 

required for items such as initial direct costs paid or incentives received.

The lease liability is located in “Interest payable and other liabilities” on the

 

consolidated statement of financial condition and was $

34

million at December 31, 2022.

As of December 31, 2022, the weighted-average remaining lease term is

11.6

 

years and the weighted-average discount rate was

2.54

% utilizing the Company’s incremental FHLB borrowing rate for borrowings of

 

a similar term at the date of lease commencement.

The following table presents components of operating lease expense in

 

the accompanying consolidated statements of operations for

the year ended December 31, 2022:

Year Ended December 31, 2022

(Dollars in thousands)

Finance lease amortization of right-of-use asset

$

231

Finance leases interest on lease liability

185

Operating lease expense

2,577

Variable lease expense

1,222

Short-term lease expense

20

Total lease expense

$

4,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

89

Future minimum lease payments under operating leases were as follows:

Operating Leases

Finance Lease

(Dollars in thousands)

2023

$

3,583

$

490

2024

3,289

490

2025

3,309

490

2026

3,350

490

2027

3,340

528

Thereafter

12,619

8,296

Total lease payments

29,490

10,784

Less: imputed interest

3,262

3,163

Total

$

26,228

$

7,621

Rent expense for the years ended December 31, 2021 and 2020 was $

3.5

 

million and $

2.9

 

million, respectively.

Supplemental cash flow information – Operating cash flows paid for

 

operating lease amounts included in the measurement of lease

liabilities was $

3.0

 

million for the year ended December 31, 2022. Operating cash flows paid for finance

 

lease amounts included in the

measurement of lease liabilities was $

0.4

 

million for the year ended December 31, 2022. During the year ended December 31,

 

2022, the

Company recorded ROU assets in the amount of $

23.6

 

million that were exchanged for operating lease liabilities and $

7.8

 

million that were

exchanged for finance lease liabilities.

Note 7:

 

Goodwill and Core Deposit Intangible

In connection with our acquisition of Central, the Company recorded

 

goodwill of $

12.8

 

million. Goodwill is measured as the excess

of the fair value of consideration paid over the fair value of net assets acquired.

No

 

goodwill impairment was recorded during the years

ended December 31, 2022 or December 31, 2021.

The Company recorded a core deposit intangible (“CDI”) of $

16.5

 

million as part of the Central acquisition. The Company is

amortizing the CDI over its estimated useful life of approximately

10

 

years using the sum of the years’ digits accelerated method. The

Company recognized core deposit intangible amortization expense

 

of $

0.4

 

million for the year ended December 31, 2022 which is included

in other non-interest expense in the consolidated statement of operations.

The gross carrying amount of goodwill and the gross carrying amount

 

and accumulated amortization of the core deposit intangible

 

at December 31, 2022 and 2021 were:

Gross Carrying

Amount

Accumulated

Amortization

Net Carrying

Amount

(Dollars in thousands)

December 31, 2022

Goodwill

$

12,836

$

—

$

12,836

Core deposit intangible

17,479

1,234

16,245

Total goodwill and intangible assets

$

30,315

$

1,234

$

29,081

December 31, 2021

 

 

 

Core deposit intangible

$

1,014

$

884

$

130

Total goodwill and intangible assets

$

1,014

$

884

$

130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

90

The estimated aggregate future amortization expense over the next five years

 

for the core deposit intangible is as follows at

December 31, 2022:

 

(Dollars in thousands)

2023

$

3,089

2024

2,762

2025

2,436

2026

2,109

2027

1,783

Note 8:

 

Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and

 

economic conditions.

 

The Company

principally manages its exposures to a wide variety of business and operational risks

 

through management of its core business activities. The

Company manages economic risks, including interest rate, liquidity, and

 

credit risk primarily by managing the amount, sources, and duration

of its assets and liabilities and the use of derivative financial instruments.

 

Specifically, the Company enters into derivative financial

instruments to manage exposures that arise from business activities that result in the receipt

 

or payment of future known and uncertain cash

amounts, the value of which are determined by interest rates.

 

Cash Flow Hedges of Interest Rate Risk

The Company uses interest rate derivatives to add stability to interest income

 

and expense and to manage its exposure to interest

rate movements. To accomplish this objective, the Company uses interest rate swaps and collars

 

as part of its interest rate risk management

strategy. Interest rate swaps designated as cash flow hedges involve

 

the receipt of variable amounts from a counterparty in exchange for the

Company making fixed-rate payments over the life of the agreements without

 

exchange of the underlying notional amount. Interest rate

collars designated as cash flow hedges involve payments of variable-rate

 

amounts if interest rates rise above the cap strike rate on the

contract and the receipt of variable-rate amounts if interest rates fall below the

 

floor strike rate on the contract. During 2022, such derivatives

were used to hedge the variable cash flows associated with existing variable

 

-rate loan assets.

 

The five swaps that were entered into in 2021

were terminated during the third quarter of 2022; however, the amortization

 

of the gains on these instruments will start in 2023 based on the

original effective dates of these swaps.

 

The Company also entered into a new interest rate collar during the

 

third quarter of 2022. Derivatives

designated and that qualify as cash flow hedges include

one

 

instrument with a notional value of $

250

 

million at December 31, 2022, and

five

instruments with an aggregate notional value of $

100

 

million at December 31, 2021.

For derivatives designated and that qualify as cash flow hedges of interest rate

 

risk, the gain or loss on the derivative is recorded in

Accumulated Other Comprehensive Income (Loss) (“AOCI”) and

 

subsequently reclassified into interest income or expense in the same

period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to

interest income and expense as interest payments are received and made

 

on the Company’s variable-rate assets and liabilities. The derivative

financial instruments did not impact the consolidated statements of operations

 

for the years ended December 31, 2022 or 2021. During the

next twelve months, the Company estimates that an $

0.1

 

million will be reclassified as a reduction to interest expense.

 

 

The Company is hedging its exposure to the variability in future cash flows for forecasted

 

transactions over a maximum period of

6.4

 

years.

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.

 

As of

December 31, 2022 and 2021, the Company had

49

 

swaps with an aggregate notional amount of $

421

 

million and

54

 

swaps with an

aggregate notional amount of $

535

 

million, respectively.

The Company’s derivative financial instruments that are not designated

 

as hedging instruments, including swap fees earned upon

origination and credit valuation adjustments (“CVA”) that repre

 

sent the risk of a counterparty’s default,

 

are reported on the consolidated

statements of operations as swap fee income, net. During 2022,

 

the Company recorded net swap fees of $

171

 

thousand.

 

During 2021, the

Company recorded a $

342

 

thousand gain for CVA adjustments primarily related to one swap.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

91

Fair Values of Derivative Instruments on the Statement of Financial Condition

The table below presents the fair value of the Company’s derivative financial

 

instruments and their classification on the consolidated

statements of financial condition as of December 31, 2022 and 2021:

Asset Derivatives

Liability Derivatives

Statement of

Financial

Condition

As of December 31,

Statement of

Financial

Condition

As of December 31,

Location

2022

2021

Location

2022

2021

(Dollars in thousands)

Interest rate products:

Derivatives designated as hedging instruments

Other assets

$

-

$

3

Other

liabilities

$

5,403

$

565

Derivatives not designated as hedging

instruments

Other assets

$

11,038

$

11,305

Other

liabilities

$

11,039

$

11,322

Total

$

11,038

$

11,308

$

16,442

$

11,887

Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive (Loss) Income

The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive

 

(Loss) Income as of

December 31, 2022 and 2021.

 

December 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

(Loss) 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

$

(5,403)

$

(5,403)

$

—

Interest Income

$

—

$

—

$

—

Interest Rate Products -

terminated

3,852

3,852

—

Interest Expense

—

—

—

Total

$

(1,551)

$

(1,551)

$

—

$

—

$

—

$

—

December 31, 2021

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

(Loss) 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

$

(562)

$

(562)

$

—

Interest Expense

$

—

$

—

$

—

Credit Risk Related Contingent Features

As of December 31, 2022, the fair value of non-designated derivatives

 

in a net asset position, which includes accrued interest but

excludes any adjustment for non-performance risk, related to these agreements

 

was $

11.0

 

million. As of December 31, 2022, the Company

has minimum collateral thresholds with certain of its derivative counterparties

 

and has received collateral of $

4.9

 

million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

92

Note 9:

 

Foreclosed Assets

Foreclosed asset activity was as follows:

As of or for the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Beginning balance

$

1,148

$

2,347

$

3,619

Transfers from loan portfolio, at fair value

—

—

930

Foreclosed asset acquired

157

—

—

Direct write-downs

—

(629)

(1,118)

Sales or other proceeds from foreclosed assets

(175)

(628)

(1,045)

Gain (loss) on sale of foreclosed assets

—

58

(39)

Ending balance

$

1,130

$

1,148

$

2,347

Foreclosed assets consisted of

two

 

commercial use facilities at December 31, 2022. For the year ended December

 

31, 2022, the

Company purchased a foreclosed property as part of the Central acquisition

 

and received proceeds from expired earnest funds on a pre-

existing property.

 

For the year ended December 31, 2021, the Company sold certain raw land foreclosed

 

upon in 2019 and a commercial use

facility foreclosed upon in 2020. During 2020, the Company sold the industrial

 

facilities that were foreclosed upon in 2019 and impaired the

raw land foreclosed upon in 2019.

 

Gain (loss) on the sale of foreclosed assets are reported on the consolidated

 

statements of operations under the foreclosed assets, net

section.

 

Note 10:

 

Interest-bearing Time Deposits

Interest-bearing time deposits in denominations of $250 thousand or

 

more were $

319

 

million and $

324

 

million as of December 31,

2022 and 2021, respectively.

The Company acquires brokered deposits in the normal course of business. At December 31, 2022 and 2021, brokered

 

deposits of

approximately $

382

 

million and $

91

 

million, respectively, were included in the Company’s time deposit balance. Reciprocal

 

deposits, which

includes The Certificate of Deposit Account Registry Services (“CDARS”) discussed below, are treated as core deposits instead of

 

brokered

deposits and are not included in the above amounts.

The Company is a member of CDARS that allows depositors to receive FDIC insurance

 

on amounts greater than the FDIC

insurance limit, which is currently $250,000. CDARS allows institutions to break

 

large deposits into smaller amounts and place them in a

network of other CDARS institutions to ensure full FDIC insurance is gained

 

on the entire deposit. CDARS totaled approximately $

4

 

million

and $

50

 

million as of December 31, 2022 and 2021, respectively.

The scheduled maturities for time deposits are provided in

Note 11: Borrowing Arrangements

 

below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

93

Note 11:

 

Borrowing Arrangements

The following table summarizes borrowings at December 31, 2022

 

and 2021:

As of and For the Year Ended

 

December 31,

2022

2021

(Dollars in thousands)

Balance

Rate

(7)

Maximum Balance at

Any End of Month

Balance

Rate

(7)

Maximum Balance at

Any End of Month

Repurchase agreements

(1)

$

—

 

NA

 

%

$

5,695

$

—

 

NA

 

%

$

6,218

Federal funds purchased

(2)

20,000

4.65

20,000

—

NA

—

FHLB advances

(3)

143,143

2.27

236,600

236,600

1.92

293,100

FHLB line of credit

(3)

74,968

4.48

140,000

—

NA

—

TIB line of credit

(4)

5,000

7.50

5,000

—

 

NA

 

—

SBA secured borrowing

(5)

9,396

NA

10,897

—

NA

—

Trust preferred security

(6)

1,061

6.51

%

$

1,061

1,009

1.94

%

$

1,009

Total borrowings

$

253,568

$

237,609

(1)

 

Repurchase agreements consist of Bank obligations to other parties payable

 

on demand and generally have one day maturities. The

obligations are collateralized by securities of U.S. government sponsored enterprises

 

and mortgage-backed securities and such collateral

is held by a third-party custodian. The year-to-date average daily balance was $

0

 

and $

2

 

million for the years ended December 31, 2022

and 2021, respectively. The securities, mortgage-backed government

 

sponsored residential securities, pledged for customer repurchase

agreements were $

0

 

at both December 31, 2022 and 2021.

(2)

 

Federal funds purchased include short-term funds that are borrowed from

 

another bank. The Bank is part of a third-party service that

allows us to borrow amounts from another bank if the bank has approved

 

us for credit. Federal funds purchased generally have one day

maturities.

(3)

 

FHLB advances and line of credit are collateralized by a blanket floating

 

lien on certain loans, as well as, unrestricted securities. FHLB

advances are at a fixed rate, ranging from

0.95

% to

4.25

% and are subject to restrictions or penalties in the event of prepayment. The

FHLB line of credit has a variable interest rate that reprices daily based on FHLB’s cost of

 

funds and matures on May 14, 2023.

(4)

 

TIB line of credit is a general line of credit maintained by the Company

 

for short-term liquidity.

(5)

As part of the Central acquisition, the Company acquired certain SBA loans that failed the derecognition criteria of ASC 860 and

therefore are accounted

 

for as secured borrowings.

 

The secured borrowing was recorded at estimated fair value at the date of acquisition

and reduces over time in connection with the related loan balance.

(6)

 

On June 30, 2010, the Company assumed a liability with a fair value of $

1

 

million related to the assumption of trust preferred securities

issued by Leawood Bancshares Statutory Trust I for $

4

 

million on September 30, 2005. In 2012, the Company settled litigation related

 

to

the trust preferred securities which decreased the principal balance

 

by $

1.5

 

million and the recorded balance by approximately

$

400

 

thousand. The difference between the recorded amount and the contract value of $

2.5

 

million is being accreted to the maturity date

in 2035. Distributions will be paid on each security at a variable annual rate

 

of interest, equal to LIBOR, plus

1.74

%.

(7)

Represents the year-end weighted average interest rate.

The following table summarizes the Company’s other borrowing capacities

 

at December 31, 2022 and 2021:

As of December 31,

2022

2021

(Dollars in thousands)

FHLB borrowing capacity relating to loans

$

391,910

$

435,562

FHLB borrowing capacity relating to securities

—

—

Total FHLB borrowing capacity

$

391,910

$

435,562

Unused Federal Reserve borrowing capacity

$

503,899

$

428,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

94

The scheduled maturities, excluding interest, of the Company’s borrowings at

 

December 31, 2022 were as follows:

As of December 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

$

588,981

$

349,734

$

1,997

$

1,586

$

3,269

$

—

$

945,567

Fed funds purchased &

 

 

repurchase agreements

20,000

—

—

—

—

—

20,000

FHLB borrowings

37,579

 

 

1,610

 

 

11,454

 

 

—

 

 

55,500

 

 

37,000

 

 

143,143

FHLB line of credit

74,968

—

—

—

—

—

74,968

TIB line of credit

5,000

—

—

—

—

—

5,000

SBA secured borrowing

—

—

—

—

—

9,396

9,396

Trust preferred securities

(1)

—

 

 

—

 

 

—

 

 

—

 

 

—

 

 

1,061

 

 

1,061

Total

$

726,528

$

351,344

$

13,451

$

1,586

$

58,769

$

47,457

$

1,199,135

(1)

 

The contract value of the trust preferred securities is $

2.6

 

million and is currently being accreted to the maturity date of 2035.

Note 12:

 

Income Taxes

 

The provision for income taxes includes these components:

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Current tax expense

$

17,943

$

14,892

$

7,970

Deferred income tax (benefit) expense

(1,970)

2,664

(5,257)

Income tax expense

$

15,973

$

17,556

$

2,713

An income tax reconciliation at the statutory rate to the Company’s actual income tax

 

expense is shown below:

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Computed at the statutory rate (21%)

$

16,290

$

18,263

$

3,216

Increase (decrease) resulting from

Tax-exempt income

(3,546)

(3,672)

(3,109)

Non-deductible expenses

689

232

194

State income taxes, net of federal benefits

2,785

3,030

679

Stock-based compensation

(190)

(172)

179

Goodwill impairment

—

—

1,553

Other adjustments

(55)

(125)

1

Income tax expense

$

15,973

$

17,556

$

2,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

95

The tax effects of temporary differences related to deferred taxes shown

 

on the consolidated statements of financial condition within

other assets are presented below:

As of December 31,

2022

2021

(Dollars in thousands)

Deferred tax assets

Net unrealized loss on securities available-for-sale

$

20,295

$

—

Allowance for credit losses

16,710

14,051

Lease incentive

451

508

Loan fees

4,048

3,227

Accrued expenses

3,379

2,735

Deferred compensation

2,166

2,418

State tax credit

—

1,033

Other

1,469

2,057

Total deferred tax asset

48,518

26,029

Deferred tax liability

 

 

Net unrealized gain on securities available-for-sale

—

(6,967)

FHLB stock basis

(436)

(757)

Premises and equipment

(2,042)

(2,602)

Other

(1,018)

(1,229)

Total deferred tax liability

(3,496)

(11,555)

Net deferred tax asset

$

45,022

$

14,474

The Company had a $

1.0

 

million deferred tax asset as of December 31, 2021 due to state tax credits, which were

 

completely

recognized in 2022.

The Company has approximately $

1.0

 

million of federal net operating loss carry-forwards, which expire

 

after 2028. The net

operating loss is subject to annual usage limitations of $

180

 

thousand per year, but may include unused amounts from prior years.

 

The

Company fully expects to utilize the entire net operating loss carry-forwards before

 

they expire. Due to the carry forward of federal net

operating losses, all prior years remain subject to examination by federal

 

tax authorities.

Note 13:

 

Changes in Accumulated Other Comprehensive (Loss) Income

Amounts reclassified from AOCI and the affected line items in the consolidated statements of operations were as follows:

For the Year Ended December 31,

Affected Line Item in the

2022

2021

2020

Statements of Operations

(Dollars in thousands)

Unrealized gains on available-for-sale

securities

$

96

$

1,023

$

1,704

Realized gains on available-

for-sale securities

Less: tax expense effect

24

245

415

Income tax expense

Net reclassified amount

$

72

$

778

$

1,289

Note 14:

 

Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements

 

administered by the federal banking agencies.

The Basel III Capital Rules (“Basel III”) were jointly published by three federal

 

banking regulatory agencies. Basel III defines the

components of capital, risk weighting and other issues affecting the numerator

 

and denominator in regulatory capital ratios.

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. The actions may

include dividend payment restrictions, require the adoption of

 

remedial measures to increase capital, terminate FDIC deposit insurance,

 

and

mandate the appointment of a conservator or receiver in severe cases. Under

 

capital adequacy guidelines and the regulatory framework for

prompt corrective action, the Company and the Bank must meet specific capital guidelines

 

that involve quantitative measures of assets,

liabilities and certain off-balance sheet items as calculated under U.S. GAAP, regulatory

 

reporting requirements and regulatory capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

96

standards. The capital amounts and classification are also subject to qualitative judgments by

 

the regulators about components, risk

weightings and other factors. Furthermore, the Company’s regulators

 

could require adjustments to regulatory capital not reflected in these

consolidated financial statements.

Quantitative measures established by regulation to ensure capital adequacy

 

require the Company and the Bank to maintain

minimum amounts and ratios (set forth in the table below) of total and tier 1 capital (as

 

defined) to risk-weighted assets (as defined),

common equity tier 1 capital (as defined) to risk-weighted assets (as defined),

 

and of tier 1 capital (as defined) to average assets (as defined).

 

Management believes, as of December 31, 2022, the Company and the Bank

 

met all capital adequacy requirements to which they are subject.

As of December 31, 2022, the most recent notification from the applicable

 

regulatory agencies categorized the Bank as

well

capitalized

 

under the regulatory framework for prompt corrective action. To be categorized as

well capitalized

, the Bank must maintain

minimum total risk-based, tier 1 risk-based, common equity tier 1 risk-based

 

and tier 1 leverage ratios as set forth in the table below. There

are no conditions or events since that notification that management believes

 

have changed the Bank’s category. The Company’s and the

Bank’s actual capital amounts and ratios as of December 31, 2022

 

and 2021 are presented in the following table:

Actual

Required to be Considered

Well Capitalized

Required to be Considered

Adequately Capitalized

(1)

Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in thousands)

December 31, 2022

Total Capital to Risk-Weighted Assets

Consolidated

$

715,416

10.5

%

 

N/A

 

 

N/A

 

$

714,162

10.5

%

Bank

714,300

10.5

$

679,793

10.0

%

713,783

10.5

Tier 1 Capital to Risk-Weighted Assets

 

Consolidated

644,953

9.5

N/A

N/A

578,131

8.5

Bank

643,837

9.5

543,835

8.0

577,824

8.5

Common Equity Tier 1 to Risk-Weighted Assets

Consolidated

643,892

9.5

N/A

 

N/A

 

476,108

7.0

Bank

643,837

9.5

441,866

6.5

475,855

7.0

Tier 1 Capital to Average Assets

 

Consolidated

644,953

10.3

N/A

N/A

249,270

4.0

Bank

$

643,837

10.3

%

$

311,623

5.0

%

$

249,299

4.0

%

December 31, 2021

Total Capital to Risk-Weighted Assets

 

Consolidated

$

704,544

13.6

%

N/A

N/A

$

544,060

10.5

%

Bank

681,980

13.2

$

517,817

10.0

%

543,708

10.5

Tier 1 Capital to Risk-Weighted Assets

Consolidated

646,169

12.5

N/A

 

N/A

 

440,430

8.5

Bank

623,605

12.0

414,253

8.0

440,144

8.5

Common Equity Tier 1 to Risk-Weighted Assets

 

Consolidated

645,160

12.5

N/A

N/A

362,707

7.0

Bank

623,605

12.0

336,581

6.5

362,472

7.0

Tier 1 Capital to Average Assets

Consolidated

646,169

11.8

N/A

 

N/A

 

218,510

4.0

Bank

$

623,605

11.4

%

$

272,958

5.0

%

$

218,366

4.0

%

(1)

 

Includes capital conservation buffer of

2.5

%.

 

Note 15:

 

Employee Benefit Plan

The Company has a retirement savings 401(k) plan covering substantially all employees.

 

Employees may contribute a portion of

their compensation to the plan. During 2022, Company contributions

 

to the plan were

100

% on the first

5

% of employees’ salary deferral

amounts. During 2021 and 2020, Company contributions to the plan were

100

% on the first

1

% of employees’ salary deferral amounts plus

50

% of employees’ salary deferral amounts over

1

%, but capped at

6

%, of employees’ compensation. Additional contributions are

discretionary and are determined annually by the Board of Directors. Company

 

contributions to the plan were $

2

 

million, $

1

 

million and

$

1

 

million for 2022, 2021 and 2020, respectively.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

97

Note 16:

 

Revenue from Contracts with Clients

Except for gains or losses from the sale of foreclosed assets, the Company’s revenue from contracts

 

with clients within the scope of

ASC 606 is recognized in non-interest income. The revenue categories are selected based

 

on the nature, amount, timing, and uncertainty of

revenue and cash flows. The following presents descriptions of revenue categories within

 

the scope of ASC 606:

Service charges and fees (rebates) on client accounts -

This segment consists of monthly fees for the services rendered on client

deposit accounts, including maintenance charges, overdraft fees, and

 

processing fees. The monthly fee structures are typically based on type

of account, volume, and activity. The customer is typically billed monthly and pays the

 

bill from their deposit account. The Company

satisfies the performance obligation related to providing depository

 

accounts monthly as transactions are processed and deposit service

charge revenue is recorded.

 

ATM and credit card interchange income -

This segment consists of fees charged for use of the Company’s ATMs, as well as, an

interchange fee with credit card and debit card service providers. ATM fees and interchange fees are based on the number

 

of transactions, as

well as, the underlying agreements. Clients are typically billed monthly. The Company

 

satisfies the performance obligation related to ATM

and interchange fees monthly as transactions are processed and revenue

 

is recorded.

 

International

 

fees -

This segment consists of fees earned from foreign exchange transactions and

 

preparation of international

documentation. International fees are based on underlying agreements that

 

describe the Company’s performance obligation and the related

fee. Clients are typically billed and cash is received once the service or transaction

 

is complete. The Company satisfies the performance

obligation related to international fees monthly as transactions are processed

 

and revenue is recorded.

 

Other fees -

This segment consists of numerous, smaller fees such as wire transfer fees, check

 

cashing fees, and check printing fees.

Other fees are typically billed to clients on a monthly basis. Performance obligations

 

for other fees are satisfied at the time that the service is

rendered.

Gain or loss on foreclosed assets

 

– Foreclosed assets are often sold in transactions that may not be considered

 

a contract with a

client because the sale of the asset may not be an output of the Company’s ordinary

 

activities. However, sales of nonfinancial assets,

including in-substance nonfinancial assets, should be accounted for in

 

accordance with ASC 610-20, “Other Income-Gains and Losses from

the Derecognition of Nonfinancial Assets,” which requires the Company to apply certain measurement and

 

recognition concepts of ASC 606.

Accordingly, the Company recognizes the sale of a foreclosed asset, along

 

with any associated gain or loss, when control of the asset

transfers to the buyer. For sales of existing assets, this generally will occur

 

at the point of sale. When the Company finances the sale of the

foreclosed asset to the buyer, the Company must assess whether the buyer is committed

 

to perform their obligations under the contract and

whether collectability of the transaction price is probable. Once these criteria

 

are met, the repossessed asset is derecognized and the gain or

loss on sale is recorded upon the transfer of control of the asset to the buyer.

 

The following table disaggregates the non-interest income subject

 

to ASC 606 by category:

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Non-interest income subject to ASC 606

Service charges and fees on customer accounts

$

6,228

$

4,580

$

2,803

ATM and credit card interchange income

6,523

7,996

4,379

International fees

1,408

1,531

1,091

Other fees

94

134

87

Total non-interest income from contracts with clients

14,253

14,241

8,360

Non-interest income not subject to ASC 606

 

 

 

Other non-interest income

3,028

(581)

3,373

Total non-interest income

$

17,281

$

13,660

$

11,733

Note 17:

 

Stock-Based Compensation

The Company issues stock-based compensation in the form of non-vested

 

restricted stock, restricted stock units and stock

appreciation rights (“SSARs”) under the 2018 Omnibus Equity Incentive

 

Plan (“Omnibus Plan”). The Omnibus Plan will expire on the tenth

anniversary of its effective date. The aggregate number of shares authorized for future

 

issuance under the Omnibus Plan is

1,530,702

 

shares

as of December 31, 2022. The Company will issue new common shares upon

 

exercise or vesting of stock-based awards.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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98

During 2018, awards issued under the Stock Settled Appreciation Right Plan, Equity Incentive Plan, Employee Equity

 

Incentive

Plan and New Market Founder Plan were assumed under the Omnibus Plan

 

as agreed upon with participants, impacting all participants who

agreed to the assumption. The awards are called “Legacy Awards.” Material terms and conditions of Legacy Awards remain unchanged;

therefore, no modification to their fair market value was required. Going forward,

 

all awards are issued under the Omnibus Plan.

In addition, the Company has an Employee Stock Purchase Plan (“ESPP”) that

 

was suspended effective April 1, 2019 and

reinstituted effective July 1, 2020.

The table below summarizes stock-based compensation expense for

 

the years ended December 31, 2022, 2021, and 2020:

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Stock appreciation rights

$

325

$

711

$

994

Performance-based stock awards

774

741

249

Restricted stock units and awards

3,200

3,047

3,078

Employee stock purchase plan

118

85

42

Total stock-based compensation

$

4,417

$

4,584

$

4,363

Stock Settled Appreciation

 

Rights

SSARs are granted based on the fair market value of the Company’s common

 

stock. SSARs typically vest in equal amounts over a

seven year

 

period, commencing on the first anniversary of the effective date of grant and have

fifteen-year

 

contractual terms for Legacy

Awards and

ten-year

 

contractual terms for all other SSARs. Legacy Awards include retirement eligibility upon the participant’s 65th birthday,

five years

 

of participation, and after

one year

 

holding the grant. The exercise of a SSAR entitles the participant to the excess of the exercise

price over the grant price for each SSAR.

 

Exercise price is based on the fair market value of the Company’s common

 

shares.

The calculated value of each SSAR is estimated at the grant date using a Black-Scholes

 

option valuation model. Expected volatility

is primarily based on an internal model that calculates the historical volatility of

 

the Company’s stock since the IPO and several peer group

banks’ daily average stock prices before the IPO over the expected term. The expected term of stock granted represents the period that

 

shares

are expected to be outstanding. The risk-free rate for periods within the contractual

 

life of the share award is based on the U.S. Treasury yield

curve.

For the expected term, the Company uses the simplified method described

 

in SAB Topic 14.D.2. This method uses an expected term

based on the midpoint between the vesting date and the end of the contractual term. This method

 

is used for the majority of SSARs, because

the Company does not have a significant pool of SSARs that have been exercised.

 

For some SSARs that are granted to participants who will

be retirement eligible during the term of the award, a separate analysis is performed

 

that focuses more on expected retirement date.

 

The following table provides the range of assumptions used in the Black-Scholes

 

valuation model, the weighted average grant date

fair value, and information related to SSARs exercised for the following years,

 

as well as, the remaining compensation cost to be recognized

and period over which the amount will be recognized as of the dates indicated:

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands, except per share data)

Assumptions:

Expected volatility

44.1

% -

45.41

%

42.93

% -

43.29

%

20.34

%

Expected dividends

0.00%

0.00%

0.00%

Expected term (in years)

7.00

 

-

7.01

7.00

 

-

7.01

6.00

Risk-free rate

2.8

% -

3.62

%

0.94

% -

1.36

%

0.38

%

Weighted average grant date fair value per share

$

6.86

$

6.50

$

1.93

Aggregate intrinsic value of SSARs exercised

$

1,578

$

1,297

$

571

Total fair value of SSARs vested during the year

$

484

$

1,087

$

1,245

Unrecognized compensation information:

Unrecognized compensation cost

$

795

$

1,249

$

1,737

Period remaining (in years)

4.7

4.1

3.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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99

A summary of SSAR activity during and as of December 31, 2022 is presented below:

Stock Settled Appreciation Rights

Units

Weighted Average

Exercise Price

Weighted Average

Remaining

Contractual Term

Outstanding, January 1, 2022

1,473,076

$

11.20

7.13

Granted

26,500

6.86

9.68

Exercised

(284,540)

9.60

Forfeited or expired

(55,796)

11.27

Outstanding, December 31, 2022

1,159,240

$

11.64

6.29

Exercisable, December 31, 2022

961,367

$

11.00

6.03

Performance-Based Stock

 

Awards (“PBSAs”)

The Company awards PBSAs to key officers of the Company. The stock settled awards

 

are typically granted annually as determined

by the Compensation Committee. The performance-based shares typically cliff-vest

 

at the end of

three years

 

based on attainment of certain

performance metrics developed by the Compensation Committee. The ultimate

 

number of shares issuable under each performance-based

award is the product of the award target and the award payout percentage given

 

the level of achievement. The award payout percentages by

level of achievement range between

0

% of target and

150

% of target.

 

During 2016, the Company awarded PBSAs to New Market Founders. A New Market Founder is a non-employee, adviser chosen in

a selected market to facilitate expansion of banking relationships. During

 

2016,

116,960

 

PBSAs were granted and cliff-vested on

December 31, 2021. The Company adopted ASU 2018-07 in the first quarter of 2019, which set the fair market value for

 

these awards. The

Company determined that no substantial service existed for these awards,

 

resulting in a cumulative effect adjustment of approximately

$

2

 

million to retained earnings.

 

The New Market Founder PBSAs were based upon

four

 

equally weighted market measures: total assets, total loans, return on assets

and classified assets to capital as of December 31, 2021 that resulted

 

in

139,709

 

common shares that vested and were issued in 2022. The

119

% payout percentage resulted in $

245

 

thousand of expense being recognized during the year ended December

 

31, 2021. No expense was

recorded in 2022 related to these awards.

During 2022,

19,328

 

PBSAs granted in 2019 did not meet the target payout threshold and were

 

forfeited. Additionally, in 2022, the

vesting dates for one former employee’s PBSA award were accelerated and

1,958

 

shares were issued at target.

 

During 2022,

66,667

 

PBSAs were granted. The performance metrics included a three-year cumulative

 

earnings per share target and

a cumulative relative total shareholder return target.

 

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

98,352

$

13.59

Granted

66,667

16.04

Vested

(1,958)

13.55

Forfeited

(28,775)

14.94

Unvested, December 31, 2022

134,286

$

14.52

Unrecognized stock-based compensation expense related to the performance

 

grants issued through December 31, 2022 was

$

1.2

 

million and is expected to be recognized over

1.9

 

years.

 

Restricted Stock Units (“RSUs”) and Restricted Stock

 

Awards (“RSAs”)

The Company issues RSUs and RSAs to provide additional incentives to key officers,

 

employees, and non-employee directors.

Awards are typically granted annually as determined by the Compensation

 

Committee. The service based RSUs typically vest in equal

amounts over

three years

. The service based RSAs typically cliff-vest after

one year

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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100

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

383,630

$

13.52

Granted

306,627

14.75

Vested

(220,356)

13.88

Forfeited

(52,921)

14.35

Unvested, December 31, 2022

416,980

$

14.13

Unrecognized stock-based compensation expense related to restricted stock

 

grants issued through December 31, 2022 was

$

3.6

 

million and is expected to be recognized over

1.9

 

years.

 

Employee Stock Purchase Plan

The Company has an ESPP whereby employees are eligible for the plan when they have met certain

 

requirements concerning period

of credited service and minimum hours worked. The price an employee pays for shares is

85.0

% of the fair market value of Company

common stock on the last day of the offering period.

 

The offering periods are the six-month periods commencing on January

 

1 and July 1 of

each year and ending on June 30 and December 31 of each year. There are no vesting or other

 

restrictions on the stock purchased by

employees under the ESPP.

The calculated value of each unit award is estimated at the start of the offering period

 

using a Black-Scholes option valuation model

that used the assumptions noted in the following table:

For the Year Ended December 31,

2022

2021

2020

Assumptions:

Expected volatility

24.1

% -

28.00

%

5.99

% -

32.00

%

22.50

%

Expected dividends

0.00

%

0.00

%

0.00

%

Expected term (in years)

0.50

0.50

0.50

Risk-free rate

0.19

% -

2.52

%

0.03

% -

0.09

%

0.17

%

Note 18:

 

Stock Warrants

 

The Company had

80,000

 

and

113,500

 

outstanding, fully vested warrants to purchase common stock at a strike price

 

of $

5.00

 

per

share as of December 31, 2022 and 2021, respectively, as

33,500

 

warrants were exercised during 2022. The

113,500

 

warrants were modified

during 2018 to extend the expiration date from June 30, 2019 to April 26, 2023. The strike price continues to be $

5.00

 

per share.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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101

Note 19:

 

Stockholders’ Equity

 

Earnings per share

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

 

share:

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands, except per share data)

Earnings per Share

Net Income

$

61,599

$

69,413

$

12,601

Weighted average common shares

49,489,860

51,291,428

52,070,624

Earnings per share

$

1.24

$

1.35

$

0.24

Diluted Earnings per Share

 

 

 

Net Income

$

61,599

$

69,413

$

12,601

Weighted average common shares

49,489,860

51,291,428

52,070,624

Effect of dilutive shares

512,194

739,154

477,923

Weighted average dilutive common shares

50,002,054

52,030,582

52,548,547

Diluted earnings per share

$

1.23

$

1.33

$

0.24

Stock-based awards not included because to do so would be antidilutive

523,768

658,100

1,014,639

Share repurchases

On October 18, 2021, the Company announced that its Board of Directors adopted

 

a new stock repurchase program. Under the

repurchase program, the Company may repurchase up to $

30

 

million of the Company’s common stock. As of December 31, 2021, the

Company had repurchased $

8

 

million, representing

566,164

 

common shares.

 

This repurchase program was completed in the third quarter of

2022.

On May 10, 2022, the Company announced that its Board of Directors approved

 

a new share repurchase program under which the

Company may repurchase up to $

30

 

million of its common stock. As of December 31, 2022, $

16

 

million remains available for repurchase

under this share repurchase program.

 

During 2022, the Company repurchased $

36

 

million, representing

2,448,428

 

common shares, under the repurchase programs.

Note 20:

 

Disclosure about Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability

 

in an orderly transaction between market

participants at the measurement date. Fair value measurements must maximize

 

the use of observable inputs and minimize the use of

unobservable inputs. There is a hierarchy of three levels of inputs that may be used

 

to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities,

 

quoted prices in

markets that are not active or other inputs that are observable or can be corroborated

 

by observable market data for

substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs supported by little or no market activity and significant to

 

the fair value of the assets or liabilities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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102

Recurring Measurements

The following list presents the assets and liabilities recognized in the accompanying

 

consolidated statements of financial condition

measured at fair value on a recurring basis and the level within the fair value

 

hierarchy in which the fair value measurements fall at

December 31, 2022 and 2021:

Fair Value Description

Valuation

 

Hierarchy

Level

Where Fair Value

 

Balance Can Be

Found

Available-for-

sale securities

and 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 8: Derivatives

Nonrecurring Measurements

The following tables present the fair value measurement of assets measured

 

at fair value on a nonrecurring basis and the level within

the fair value hierarchy in which the fair value measurements fall:

December 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 impaired loans

$

8,728

$

—

$

—

$

8,728

Foreclosed assets held-for-sale

$

1,745

$

—

$

—

$

1,745

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

$

38,046

$

—

$

—

$

38,046

Foreclosed assets held-for-sale

$

1,148

$

—

$

—

$

1,148

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 statements of financial

 

condition,

 

as well as the general classification of such assets

pursuant to the valuation hierarchy. For assets classified within Level 3 of

 

the fair value hierarchy, the process used to develop the reported

fair value is described below.

Collateral-Dependent Impaired 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.

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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103

Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers

maintained by management. The appraised values are reduced by discounts to consider

 

lack of marketability and estimated cost to sell if

repayment or satisfaction of the loan is dependent on the sale of the collateral.

 

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 December 31, 2022 and 2021:

December 31, 2022

Fair Value

Valuation Techniques

Unobservable

 

Inputs

Range

 

(Weighted Average)

(Dollars in thousands)

Collateral-dependent impaired

loans

$

 

8,728

 

Market comparable properties

Marketability discount

0

% -

100

%

(13%)

Foreclosed assets held-for-sale

$

1,745

 

Market comparable properties

Marketability discount

10%

(10%)

December 31, 2021

Fair Value

Valuation Techniques

Unobservable

 

Inputs

Range

 

(Weighted Average)

(Dollars in thousands)

Collateral-dependent impaired

loans

$

 

38,046

 

Market comparable properties

Marketability discount

7

% -

100

%

(26%)

Foreclosed assets held-for-sale

$

1,148

 

Market comparable properties

Marketability discount

10%

(10%)

The following tables present the estimated fair values of the Company’s financial

 

instruments at December 31, 2022 and 2021:

December 31, 2022

Carrying

Fair Value Measurements

Amount

Level 1

Level 2

Level 3

(Dollars in thousands)

Financial Assets

Cash and cash equivalents

$

300,138

$

300,138

$

—

$

—

Available-for-sale securities

769,641

—

686,901

—

Loans, net of ACL

5,310,954

—

—

5,307,607

Restricted equity securities

12,536

—

—

12,536

Interest receivable

29,507

—

29,507

—

Equity securities

2,870

—

—

2,870

Derivative assets

11,038

—

11,038

—

Financial Liabilities

Deposits

$

5,651,308

$

1,400,260

$

—

$

4,142,673

Federal funds purchased and repurchase agreements

74,968

—

74,968

—

Federal Home Loan Bank advances

143,143

—

135,086

—

Other borrowings

35,457

—

36,529

—

Interest payable

5,713

—

5,713

—

Derivative liabilities

16,442

—

16,442

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

104

December 31, 2021

Carrying

Fair Value Measurements

Amount

Level 1

Level 2

Level 3

(Dollars in thousands)

Financial Assets

Cash and cash equivalents

$

482,727

$

482,727

$

—

$

—

Available-for-sale securities

745,969

—

745,969

—

Loans, net of allowance for loan losses

4,197,838

—

—

4,178,268

Restricted equity securities

11,927

—

—

11,927

Interest receivable

16,023

—

16,023

—

Equity securities

2,642

—

2,209

433

Derivative assets

11,308

—

11,308

—

Financial Liabilities

Deposits

$

4,683,597

$

1,163,224

$

—

$

3,482,218

Federal Home Loan Bank advances

236,600

—

241,981

—

Other borrowings

1,009

 

—

2,318

—

Interest payable

1,336

—

1,336

—

Derivative liabilities

11,887

 

—

11,887

—

Note 21:

 

Commitments and Credit Risk

The Company had the following commitments at December 31,

 

2022 and 2021:

December 31, 2022

December 31, 2021

(Dollars in thousands)

Commitments to originate loans

$

134,961

$

118,651

Standby letters of credit

66,889

51,114

Unfunded commitments under lines of credit

2,705,730

1,768,231

Future lease commitments

1,888

11,100

Commitment related to investment fund

3,403

2,067

Total

$

2,912,871

$

1,951,163

Commitments to Originate Loans

Commitments to originate loans are agreements to lend to a customer as long

 

as there is no violation of any condition established in

the contract. Commitments generally have fixed expiration dates or other

 

termination clauses and may require payment of a fee. Since a

portion of the commitments may expire without being drawn upon, the total

 

commitment amounts do not necessarily represent future cash

requirements. Each customer’s creditworthiness is evaluated on a case-by-case

 

basis. The amount of collateral obtained, if deemed necessary,

is based on management’s credit evaluation of the counterparty. Collateral held

 

varies, but may include accounts receivable, inventory,

property, plant and equipment, commercial real estate and residential and

 

multifamily real estate.

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by

 

the Company to guarantee the performance of a

customer to a third-party. Financial standby letters of credit are primarily

 

issued to support public and private borrowing arrangements,

including commercial paper, bond financing and similar transactions. Performance

 

standby letters of credit are issued to guarantee

performance of certain clients under nonfinancial contractual obligations. The

 

credit risk involved in issuing standby letters of credit is

essentially the same as that involved in extending loans to clients. Fees for letters of credit are

 

initially recorded by the Company as deferred

revenue and are included in earnings at the termination of the respective agreements.

 

Should the Company be obligated to perform under the standby letters of

 

credit, the Company may seek recourse from the customer

for reimbursement of amounts paid.

Lines of Credit

Lines of credit are agreements to lend to a client as long as there is no violation

 

of any condition established in the contract. Lines of

credit generally have fixed expiration dates. Since a portion of the line

 

may expire without being drawn upon, the total unused lines do not

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

105

necessarily represent future cash requirements. Each customer’s creditworthiness

 

is evaluated on a case-by-case basis. The amount of

collateral obtained, if deemed necessary, is based on management’s credit evaluation

 

of the counterparty.

Collateral held varies but may include accounts receivable, inventory, property,

 

plant and equipment, commercial real estate and

residential real estate. Management uses the same credit policies in granting

 

lines of credit as it does for on-balance sheet instruments.

Commitments related to Investment Fund

 

During 2022, the Company entered into a subscription agreement with two third

 

parties to invest up to $

3.5

 

million in investment

funds designed to help accelerate technology adoption at community banks.

Lease Commitments

 

The Company entered into a lease agreement with a third party for office space

 

located in Fort Worth, Texas, which is expected to

commence in the second quarter of 2023. The initial lease term is

10.8

 

years with

one

,

seven year

 

renewal option.

 

Note 22:

 

Parent Company Condensed Financial Statements

The following are the condensed financial statements of CrossFirst Bankshares,

 

Inc. (Parent only) for the periods indicated:

Condensed Statements of Financial Condition

Year Ended December 31,

2022

2021

(Dollars in thousands)

Assets

Investment in consolidated subsidiaries

 

Banks

$

608,545

$

646,027

Equity method investments

2,597

433

Cash

4,457

23,368

Other assets

8,776

1,596

Total assets

$

624,375

$

671,424

Liabilities and stockholders' equity

Other borrowings

$

5,000

$

—

Trust preferred securities, net

1,061

1,009

Other liabilities

9,715

2,842

Total liabilities

15,776

3,851

Stockholders' equity

 

 

Common stock

530

526

Treasury stock at cost

(64,127)

(28,347)

Additional paid-in capital

530,658

526,806

Retained earnings

206,095

147,099

Accumulated other comprehensive (loss) income

(64,557)

21,489

Total stockholders' equity

608,599

667,573

Total liabilities and stockholders' equity

$

624,375

$

671,424

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

106

Condensed Statements of Operations

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Income

Equity in undistributed earnings of subsidiaries

$

30,267

$

71,528

$

13,682

Distributions from subsidiaries

32,847

—

—

Management fees charged to subsidiaries

8,520

8,520

8,520

Other

153

2

(18)

Total income

71,787

80,050

22,184

Expense

 

 

 

Salaries and employee benefits

4,272

6,111

5,143

Occupancy, net

409

403

405

Other

5,893

4,718

4,220

Total expense

10,574

11,232

9,768

Income tax benefit

(386)

(595)

(185)

Net income

$

61,599

$

69,413

$

12,601

Condensed Statements of Cash Flows

For the Year Ended December 31,

2022

2021

2020

(Dollars in thousands)

Operating Activities

Net income

$

61,599

$

69,413

$

12,601

Adjustments to reconcile net income to net cash provided by operating

activities:

Earnings of consolidated subsidiaries

(30,267)

(71,528)

(13,682)

Share-based incentive compensation

1,511

2,332

1,917

Other adjustments

(256)

(155)

(412)

Net cash provided by operating activities

32,587

62

424

Investing Activities

Decrease in investment in subsidiaries

(18,000)

—

870

Increase in equity investments

(2,164)

(433)

—

Net cash (used in) provided by investing activities

(20,164)

(433)

870

Financing Activities

Proceeds from TIB line of credit

5,000

—

—

Issuance of common stock, net

4

3

3

Open market common share repurchases

(35,780)

(22,286)

(6,061)

Acquisition of common stock for tax withholding obligations

(929)

(860)

(1,236)

Proceeds from employee stock purchase plan

364

172

151

Net decrease in employee receivables

7

34

47

Net cash used in financing activities

(31,334)

(22,937)

(7,096)

Decrease in cash

(18,911)

(23,308)

(5,802)

Cash at beginning of year

23,368

46,676

52,478

Cash at end of year

$

4,457

$

23,368

$

46,676

Note 23.

 

Subsequent Events

Subsequent events have been evaluated through March 3, 2023,

 

which is the date the consolidated financial statements were

available to be issued.

On February 23, 2023, we filed a universal shelf registration statement on Form

 

S-3 with the Securities and Exchange Commission

which became effective on March 2, 2023. The shelf registration statement

 

is intended to provide us with financial flexibility to raise capital

 

 

Table of Contents

107

from the offering of up to $

250

 

million of any combination of common stock, preferred stock, debt securities,

 

depositary shares, warrants,

purchase contracts, purchase units, subscription rights and units in one or multiple

 

offerings while the shelf registration statement is effective.

Item 9.

 

Changes in and Disagreements with

 

Accountants on Accounting

 

and Financial

Disclosure

None.

 

Item 9A.

 

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 Rules 13a-15(e) and 15d-15(e) of the

Exchange Act, as of December 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

 

in recording, processing, summarizing and reporting, on a

timely basis, information required to be disclosed by the Company

 

in the reports that we file or submit under the Exchange Act as of

December 31, 2022.

Management’s Report on Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining

 

adequate internal control over financial reporting

as defined in Rule 13a-15(f) under the Exchange Act. Our systems of internal controls are designed under the supervision

 

and with the

participation of management, including our Chief Executive Officer and

 

Chief Financial Officer, to provide reasonable assurance regarding

the reliability of financial reporting and the preparation of our financi

 

al statements for external purposes in accordance with GAAP.

Because of its inherent limitations, internal control over financial reporting

 

may not prevent or detect all misstatements. Also,

projections of any evaluation of effectiveness as to future periods are

 

subject to the risk that controls may become inadequate because of

changes in conditions or that the degree of compliance with the policies or

 

procedures may deteriorate. In addition, given the Company’s

size, operations and footprint, lapses or deficiencies in internal controls

 

may occur from time to time.

On November 22, 2022, the Company completed the merger

 

with Central.

 

The Company is in the process of evaluating the existing

controls and procedures of Central and integrating Central into the

 

internal control over financial reporting process.

 

In accordance with SEC

Staff guidance permitting a company to exclude an acquired

 

business from management’s assessment

 

of the effectiveness of internal control

over financial reporting for the year in which the acquisition is completed,

 

the Company has excluded Central from the assessment of the

effectiveness of internal control over financial reporting

 

as of December 31, 2022. Operations of Central comprised 0.42% of

 

net income for

the year ended December 31, 2022.

 

The scope of management’s assessment of

 

the effectiveness of the design and operation of the

Company’s disclosure

 

controls and procedures as of December 31, 2022 includes all of the Company’s

 

consolidated operations except for

those disclosure

 

controls and procedures of Central that are included in internal control over financial

 

reporting.

Management assessed our internal control over financial reporting as of

 

December 31, 2022. This assessment was based on criteria

established in the 2013 Internal Control - Integrated Framework issued

 

by the Committee of Sponsoring Organizations of the Treadway

Commission (“COSO”). Based on this assessment, we have concluded

 

that, as of December 31, 2022, our internal control over financial

reporting was effective.

Our internal control over financial reporting continues to be updated

 

as necessary to accommodate modifications to our business

processes and accounting procedures. There has been no change in our internal

 

control over financial reporting (as such term is defined in

Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2022 that has materially affected, or is reasonably

 

likely

to materially affect, our internal control over financial reporting.

Item 9B.

 

Other Information

None.

 

Item 9C.

 

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

108

Part III

Item 10.

 

Directors, Executive Officers and Corporate Governance

The information required by this item regarding our directors is incorporated

 

by reference to the information to be set forth under

the captions “Board & Governance Matters - Proposal 1 - Election of Directors,”

 

“Proxy Summary and Highlights - Information Regarding

the Board and Director Nominees,” “Delinquent Section 16(a) Reports,” “Board

 

and Committee Structure and Operations - Committee

Matters,” “Board and Committee Structure and Operations – Board

 

and Committee Meetings,” and “Code of Business Conduct and Ethics”

in our proxy statement for our 2023

 

annual meeting of stockholders (the “2023 Proxy Statement”). The information required by

 

this item

regarding our executive officers is incorporated by reference to Part I of this Annual Report on Form 10-K under the

 

caption “Information

About our Executive Officers.”

There have been no material changes to the procedures by which security holders

 

may recommend nominees to our Board of

Directors since our last disclosure thereof in our 2022 proxy statement.

Item 11.

 

Executive Compensation

The information required by this item regarding compensation

 

of executive officers and directors is incorporated by reference to the

information to be set forth under the captions (including the subcaptions

 

found within these captions) “Director Compensation,” “Executive

Compensation,” “Executive Compensation Tables,” and “Corporate

 

Governance - Other Matters - Compensation Committee Interlocks and

Insider Participation” in the 2023 Proxy Statement and

Note 17: Stock-Based Compensation

 

within the Notes to the Consolidated Financial

Statements.

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and

Related Stockholder Matters

The information required by this item, other than the equity compensation

 

plan information presented below, is incorporated by

reference to the information to be set forth under the caption “Beneficial Ownership

 

of Company Common Stock” in the 2023 Proxy

Statement and

Note 17: Stock-Based Compensation

 

within the Notes to the Consolidated Financial Statements.

Securities Authorized for Issuance

 

under Equity Compensation Plans

Set forth below is information as of December 31, 2022 regarding

 

equity compensation plans:

Plan Category

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights

Weighted average exercise

price of outstanding

options, warrants and

rights

Number of securities

remaining available for

future issuance under

equity compensation plans

Equity compensation plans

 

 

approved by stockholders

—

—

799,952

(1)

Equity compensation plans not

 

 

approved by stockholders

1,239,240

(2)

$

11.21

(3)

1,530,702

(4)

Total

1,239,240

$

11.21

2,330,654

(1)

Represents the number of securities remaining available under the Employee Stock Purchase Plan.

(2)

Includes 100,000 shares issuable upon exercise of stock appreciation rights, 80,000 shares issuable upon exercise of warrants, and 1,059,240 shares

issuable upon exercise of stock appreciation rights granted under the 2018 Omnibus Equity Incentive Plan (the "Omnibus Plan").

(3)

Represents the weighted average exercise price of outstanding stock appreciation rights and warrants. Includes the weighted average exercise price of

$28.50 for stock appreciation rights, $5.00 for shares issuable upon exercise of warrants and $10.05 for stock appreciation rights granted under the

Omnibus Plan.

(4)

Available shares can be granted in the form of stock appreciation rights, options, restricted stock, restricted stock units, or performance awards. The

number of securities remaining available under the Omnibus Plan was 1,530,702.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

109

The Omnibus Plan was established to promote the Company’s long-term

 

financial success by providing a means for the Company to

attract and retain individuals who can and do contribute to the Company’s

 

success and profitability. All employees and directors of, and

certain other service providers to, the Company and its affiliates are eligible to become

 

participants in the 2018 Equity Incentive Plan. The

Compensation Committee will determine the specific individuals who

 

will be granted awards under the Omnibus Plan and the type and

amount of any such awards and may permit awards to be granted or transferred

 

to certain entities related to participants. Pursuant to the

Omnibus Plan, the Compensation Committee is allowed to grant awards

 

to eligible persons in the form of non-qualified stock options, stock

appreciation rights, restricted stock, restricted stock units, performance

 

shares, performance units and other stock-based awards. Up to

2,600,000 shares of common stock are reserved for issuance under the Omnibus

 

Plan; however, any shares issued pursuant to or subject to a

Legacy Award do not count against the maximum share limit under the Omnibus Plan. A non-employee director may not be granted any

award under the Omnibus Plan which is denominated in shares in any one calendar

 

year for which the number of shares granted exceeds a

number equal to the quotient of $200 thousand divided by the grant date fair

 

value of the award (determined under applicable accounting

principles), rounded down to the nearest whole share. Awards vest, become exercisable and contain such other terms and conditions

 

as

determined by the Compensation Committee and set forth in the individual

 

agreements with the participants receiving the awards. The

Omnibus Plan enables the Compensation Committee to set specific performance

 

criteria that must be met before an award vests under the

Omnibus Plan.

 

See

Note 17: Stock-Based Compensation

 

for additional information about the Omnibus Plan.

Item 13.

 

Certain Relationships and Related Transactions, and Director

 

Independence

The information required by this item is incorporated by reference to

 

the information to be set forth under the captions “Policies and

Procedures Regarding Related Person Transactions,” “Certain Transactions,” “Corporate

 

Governance - Director Nominations, Skills and

Qualifications - Director Independence,” and “Board and Committee

 

Structure and Operations - Committee Matters” in the 2023 Proxy

Statement.

 

Item 14.

 

Principal Accountant

 

Fees and Services

The information required by this item is incorporated by reference to

 

the information to be set forth under the caption “Audit

Matters - Independent Registered Public Accounting Firm Fees” and “Audit Matters - Policy Regarding Pre-Approval

 

of Independent

Registered Public Accounting Firm Services” in the 2023 Proxy Statement.

 

The independent Registered Public Accounting Firm is

FORVIS, LLP

 

(Public Company Accounting Oversight Board Firm ID No.

686

) located in

Kansas City, Missouri

Part IV

Item 15.

 

Exhibits and Financial Statement Schedules

(a) (1) Financial Statements

The following financial statements of CrossFirst Bankshares, Inc. and its subsidiaries, and

 

the auditor’s report thereon are filed as

part of this report under Item 8. Financial Statements and Supplementary

 

Data:

Page Number

Report of FORVIS, LLP Independent Registered Public Accounting Firm

56

Consolidated Statements of Financial Condition

58

Consolidated Statements of Operations

59

Consolidated Statements of Comprehensive (Loss) Income

60

Consolidated Statements of Stockholders’ Equity

61

Consolidated Statements of Cash Flows

62

Notes to Consolidated Financial Statements

63

(a) (2) Financial Statement Schedules:

All financial statement schedules for CrossFirst Bankshares, Inc. and its subsidiaries

 

have been included in this Form 10-K in the

consolidated financial statements or the related footnotes, or they are

 

either inapplicable or not required.

 

 

 

 

 

 

 

 

Table of Contents

110

(a) (3) Exhibits

 

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

Exhibit

Filing

Date/Period End

Date

3.1

Articles of Incorporation of CrossFirst Bankshares, Inc.

S-1

3.1

July 18, 2019

3.2

Amendment to Articles of Incorporation of CrossFirst Bankshares, Inc.

S-1

3.2

July 18, 2019

3.3

Bylaws of CrossFirst Bankshares, Inc.

S-1

3.3

July 18, 2019

4.1

Specimen Common Stock Certificate

S-1

4.1

July 18, 2019

4.2

Form of Warrant Agreement

S-1/A

4.2

July 29, 2019

4.3

Description of Securities

10-K

4.3

March 10, 2020

10.1

Employment Agreement with Mike Maddox dated

June 1, 2020

†

10-Q

10.1

August 12, 2020

10.2

Employment Agreement with Benjamin R. Clouse, dated July 12, 2021†

10-Q

10.1

November 2, 2021

10.3

Employment Agreement with Amy Fauss dated July 29, 2016†

S-1

10.8

July 18, 2019

10.4

First Amendment to Employment Agreement with Amy Fauss dated

March 15, 2019†

S-1

10.9

July 18, 2019

10.5

Amended and Restated Employment Agreement with Randy Rapp, dated

effective July 1, 2022†

10-Q

10.1

August 3, 2022

10.6

2018 Omnibus Equity Incentive Plan†

S-1

10.15

July 18, 2019

10.7

Form of Legacy RSU - New Market Founders Award†

S-1

10.16

July 18, 2019

10.8

Form of Legacy EIP 2018 RSU Award Agreement†

S-1

10.17

July 18, 2019

10.9

Form of Legacy SAR Award Agreement†

S-1

10.18

July 18, 2019

10.10

Form of EEIP Legacy RSU Award Agreement†

S-1

10.19

July 18, 2019

10.11

Form of RSU Award Agreement†

S-1

10.20

July 18, 2019

10.12

Form of 2019 RSU Award Agreement†

S-1

10.21

July 18, 2019

10.13*

Omnibus Plan – Form of Time-Based RSU Award Agreement (02.23)†

10.14

Form of Performance Share Award Agreement

†

10-K

10.18

February 28, 2022

10.15*

Omnibus Plan – Form of Performance-Based RSU Award Agreement

(02.23)†

10.16

Form of Director Restricted Stock Award†

S-1

10.23

July 18, 2019

10.17*

Omnibus Plan – Director Restricted Stock Award (02.23)

†

10.18

Form of Indemnification Agreement†

S-1

10.24

July 18, 2019

10.19

Director Deferred Fee Program†

S-1

10.25

July 18, 2019

10.20*

Omnibus Plan – SAR Award Agreement†

10.21

Annual Incentive Plan†

10-Q

10.1

May 14, 2020

10.22

Employment Agreement with Steve Peterson dated July 1, 2020†

10-Q

10.2

August 12, 2020

10.23

Senior Executive Severance Plan†

10-Q

10.3

August 12, 2020

10.24

Employment Agreement with Jana D. Merfen Dated January 27, 2021†

10-Q

10.1

May 6, 2021

21.1*

Subsidiaries of CrossFirst Bankshares, Inc.

23.1*

Consent of Forvis, LLP

31.1*

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of

the Exchange act, as adopted pursuant to Section 302 of the Sarbanes-

Oxley Act of 2002

31.2*

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of

the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-

Oxley Act of 2002Oxley Act of 2002

32.1**

Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section

906 of the Sarbanes-Oxley Act of 2002

101.INS*

XBRL Instance Document - the instance document does not appear in the

Interactive Data File because its XBRL tags are embedded within the Inline

XBRL document.

101.SCH*

Inline XBRL Taxonomy Extension Schema

101.CAL*

Inline XBRL Extension Calculation Linkbase

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase

104*

Cover Page Interactive Data File (formatted in Inline XBRL and contained

in Exhibit 101)

* Filed Herewith

**Furnished Herewith

† Indicates a management contract or compensatory plan

Table of Contents

111

Item 16.

 

Form 10-K Summary

Not applicable.

 

 

Table of Contents

112

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

March 3, 2023

/s/ Benjamin R. Clouse

 

Benjamin R. Clouse

 

Chief Financial Officer

 

(Principal Financial Officer and

Principal Accounting Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

113

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons

 

on

behalf of the Registrant and in the capacities and on the date indicated.

Signature

Title

Date

/s/ Rod Brenneman

 

Director (Chairman)

March 3, 2023

Rod Brenneman

/s/ Michael J. Maddox

Director, President and Chief Executive Officer (Principal Executive Officer)

March 3, 2023

Michael J.

 

Maddox

/s/ Benjamin R. Clouse

Chief Financial Officer (Principal Financial Officer and Principal Accounting

Officer)

March 3, 2023

Benjamin R. Clouse

/s/ George Bruce

Director

March 3, 2023

George Bruce

/s/ Steven W. Caple

Director

March 3, 2023

Steven W.

 

Caple

/s/ Ron Geist

Director

March 3, 2023

Ron Geist

/s/ Jennifer Grigsby

Director

March 3, 2023

Jennifer Grigsby

/s/ George E. Hansen III

Director

March 3, 2023

George E. Hansen III

/s/ Lance Humphreys

Director

March 3, 2023

Lance Humphreys

/s/ Mason King

Director

March 3, 2023

Mason King

/s/ James Kuykendall

Director

March 3, 2023

James Kuykendall

/s/ Kevin Rauckman

Director

March 3, 2023

Kevin Rauckman

/s/ Michael Robinson

Director

March 3, 2023

Michael Robinson

/s/ Grey Stogner

Director

March 3, 2023

Grey Stogner

/s/ Stephen K. Swinson

Director

March 3, 2023

Stephen K. Swinson