UNITED STATES
SECURITIES AND EXCHANGE
 
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
 
☒
 
QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
SeptemberJune 30, 20222023
 
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
)
754-9704901-4516
 
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
 
since last report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CFB
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required
 
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
 
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
 
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
 
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☒
If an emerging growth company, indicate by check mark if the registrant has elected not
 
to use the extended transition period for
complying with any new or revised financial accounting standards provided
 
pursuant to Section 13(a) of the Exchange Act.
 
☐
 
Indicate by check mark whether the registrant is a shell company (as defined
 
in Rule 12b-2 of the Exchange Act). Yes
 
☐
 
No
 
☒
As of November 7, 2022,August 1, 2023, the registrant had
48,617,78049,290,990
 
shares of common stock, par value $0.01, outstanding.
 
2
CrossFirst Bankshares, Inc.CROSSFIRST BANKSHARES, INC.
Form 10-Q for the Quarter Ended SeptemberJune 30, 20222023
Index
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Forward-Looking Information
4
5
6
7
9
11
10
15
15
19
37
39
39
39
40
42
43
47
47
47
49
49
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
50
52
52
56
57
59
60
60
60
61
64
67
68
69
71
72
Part II. Other Information
72
72
73
73
74
75
 
3
Forward-Looking Information
All statements contained in this quarterly report on Form 10-Q that do not directly
 
and exclusively relate to historical facts
constitute forward-looking statements. These statements are often, but not always, made
 
through the use of words or phrases such as
“may,” “might,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,”
 
“will,” “anticipate,” “seek,” “estimate,” “intend,”
“plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,”
 
“annualized”annualized,” “position” and “outlook,” or the negative of these words
or other
comparable words or phrases of a future or forward-looking nature.
For example,
our forward-looking statements include statements
statements regarding our business plans, expectations, opportunities or plans opportunities
for growth; the proposed
impact of the acquisition of Farmers & StockmensCanyon
Bancorporation, Inc. and Canyon Community Bank, the bank
subsidiary of Central Bancorp, Inc.N.A. (collectively Farmers & Stockmens Bank
 
and Central Bancorp, Inc. are herein referred to as
“Central”Canyon”); our expense management initiatives and the results
expected to be realized from those initiatives; our anticipated financial
results, expenses, cash requirements and sources of
liquidity; and
our capital allocation strategies and plans.
Unless we state otherwise or the context otherwise requires, references
 
belowin this Form 10-Q to “we,” “our,” “us,” and the “Company”
“Company” refer to
CrossFirst Bankshares, Inc., and its consolidated subsidiaries.
References in this Form 10-Q to “CrossFirst Bank”
Bank” and the “Bank” refer to CrossFirst Bank,
our wholly owned consolidated
bank subsidiary.
These forward-looking statements are not historical facts, and are based
 
on current expectations, estimates and projections about
our industry, management’s beliefs and certain assumptions made by management,
 
by management, many of which, by their nature, are inherently
uncertain and beyond our control. Accordingly, the Company cautionswe caution you that any such forward-looking statements are
 
statements are not guarantees
a guarantee of future
performance and are subject to risks, assumptions, estimates and uncertainties
 
that are difficult to predict. Although we believe that the
Company believes that the expectations reflected in these forward-looking
statements are reasonable
as of the date made, actual results
may prove to be materially
different from the results expressed or
implied by the forward-looking
statements due to a number of factors, including, without
limitation: impacts on us and our clients of a decline in general business and
economic conditions and any regulatory responses thereto,
including without limitation: risks associated with the ongoing COVID-19
pandemic, decline in economic conditionsuncertainty and volatility in the United
States and the Company’s market areas, fluctuations infinancial markets; interest rates, business strategyrate fluctuations;
 
execution,our ability to effectively execute our growth
strategy and manage our growth, including identifying and consummating
expansion,suitable mergers and acquisitions, entering new lines of
business or offering new or enhanced services products or product
enhancements, phase-out of the London Interbank Offered Rate
(LIBOR) and uncertainty relating to alternative reference rates, fluctuationproducts; fluctuations in fair value
 
of fair valueour investments due to factors outside of our investment securities,
control; our ability to successfully manage credit qualityrisk and the sufficiency of our
allowance; geographic concentration of our markets;
risk,economic impact on our commercial real estate and commercial-based loan
portfolios, including declines in commercial and residential
real estate values, hiringvalues; an increase in non-performing assets; our ability to
attract, hire and retention ofretain key personnel; maintaining and increasing
personnel,customer deposits, funding availability, liquidity and our ability to raise and
maintain sufficient capital; competition withfrom banks, credit
unions and other
entities that offer financial services changes in liquidity requirements,providers; the effectiveness of our risk
 
demand for loans in the Company’s market areas, changes inmanagement framework; accounting estimates; our ability to
accounting and tax principles, estimates made on income taxes,maintain effective internal control over financial reporting; our ability
to keep pace
with technological change, cybersecuritychanges; cyber incidents
or other
failures, disruptions or security breaches,breaches; employee error, fraud committed against
 
against the Company or our clients, failureor incomplete or
inaccurate information about clients and counterparties; mortgage markets; our
ability to maintain our reputation; costs and effects of
litigation; environmental liability; risk exposure from transactions with financial
counterparties; severe weather, natural disasters,
pandemics or other external events; changes in laws, rules, regulations,
interpretations or policies relating to financial institutions,
including stringent capital requirements, higher FDIC insurance premiums and
assessments, consumer protection laws and privacy laws;
volatility in our stock price; the ability of our third-party services
providers, reputationalBoard to issue our preferred stock; risks intellectual property infringement,
 
legislative and regulatory changes, risks inherent with proposed
business acquisitions such as the acquisition and integration of Farmers
& Stockmens Bank, and the failure to achieve projected
synergies; or other external events.
 
Additional discussion of these and other risk factors can be found in
our Annual Report on Form 10-
K10-K for the fiscal year ended December 31, 2021,2022 (“2022 Form 10-K”), filed with the Securities and
Exchange
Commission (“SEC”) on February 28, 2022,March 3, 2023, and
in our other filings
with the SEC.
 
Except as required by law, the Company undertakes no obligation to update
 
update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes
 
changes in our business, results of operations or financial condition over
time. Given these risks and uncertainties, readers are cautioned not to place undue reliance
 
on such forward-looking statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table of Contents
See Notes to Condensed Consolidated Financial Statements (unaudited)
4
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2022
December 31, 2021
(1)
(Unaudited)
(Dollars in thousands)
Assets
Cash and cash equivalents
$
309,135
$
482,727
Available-for-sale securities - taxable
174,004
192,146
Available-for-sale securities - tax-exempt
482,523
553,823
Loans, net of unearned fees
4,677,646
4,256,213
Allowance for credit losses on loans
(2)
55,864
58,375
Loans, net of the allowance for credit losses on loans
4,621,782
4,197,838
Premises and equipment, net
64,313
66,069
Restricted equity securities
9,277
11,927
Interest receivable
20,553
16,023
Foreclosed assets held for sale
973
1,148
Bank-owned life insurance
68,698
67,498
Other
97,719
32,258
Total assets
$
5,848,977
$
5,621,457
Liabilities and stockholders’ equity
Deposits
Non-interest-bearing
$
1,113,934
$
1,163,224
Savings, NOW and money market
3,123,410
2,895,986
Time
750,171
624,387
Total deposits
4,987,515
4,683,597
Federal Home Loan Bank advances
205,349
236,600
Other borrowings
1,048
1,009
Interest payable and other liabilities
74,518
32,678
Total liabilities
5,268,430
4,953,884
Stockholders’ equity
Common stock, $
0.01
par value:
Authorized -
200,000,000
shares, issued -
53,018,448
and
52,590,015
shares at
September 30, 2022 and December 31, 2021, respectively
530
526
Treasury stock, at cost:
4,230,752
and
2,139,970
shares held at September 30, 2022 and December 31,
2021, respectively
(59,328)
(28,347)
Additional paid-in capital
529,646
526,806
Retained earnings
194,148
147,099
Accumulated other comprehensive (loss) income
(84,449)
21,489
Total stockholders’ equity
580,547
667,573
Total liabilities and stockholders’ equity
$
5,848,977
$
5,621,457
(1)
The year-end Condensed Consolidated Balance Sheet was derived from
audited financial statements but does not include all
disclosures required by accounting principles generally accepted in the
United States of America.
(2)
As of December 31, 2021, this line represents the allowance for loan and
lease losses. See further discussion in “Note 1: Nature of
Operations and Summary of Significant Accounting Policies”
in the Notes to Condensed Consolidated Financial Statements
(unaudited).
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (unaudited)– Unaudited
54
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED
FINANCIAL STATEMENTS
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITEDConsolidated Statements of Financial Condition – Unaudited
Three Months EndedJune 30, 2023
Nine Months Ended
September 30,
September 30,
December 31, 2022
2021
2022
2021
(Dollars in thousands except per share data)thousands)
Interest IncomeAssets
Loans, including feesCash and cash equivalents
$
59,211342,497
$
42,664
$
149,266
$
130,268300,138
Available-for-sale securities - taxable
1,119297,097
803
3,250
2,423198,808
Available-for-sale securities - tax-exempt
3,905446,803
3,562488,093
11,442
10,410
Deposits with financial institutions
1,193
121
1,714
359
Dividends on bank stocks
122
161
478
488
Total interest income
65,550
47,311
166,150
143,948
Interest Expense
Deposits
14,909
4,211
23,152
14,789
Fed funds purchased and repurchase agreements
9
-
83
3
Federal Home Loan Bank Advances
898
1,275
3,302
3,838
Other borrowings
39
24
94
72
Total interest expense
15,855
5,510
26,631
18,702
Net Interest Income
49,695
41,801
139,519
125,246
Provision for Credit Losses
(1)
3,334
(10,000)
4,844
1,000
Net Interest Income after Provision for Credit Losses
(1)
46,361
51,801
134,675
124,246
Non-Interest Income
Service charges and fees on customer accounts
1,566
1,196
4,520
3,330
Realized (losses) gains on available-for-sale securities
(4)
1,046
(43)
1,043
Unrealized gains (losses) on equity securities,Loans, net
(87)
(6,210)
(261)
(6,243)
Income from bank-owned life insurance
405
427
1,200
3,088
Swap fees and credit valuation adjustments, net
(7)
31
123
156
ATM and credit card interchange income
1,326
1,735
5,513
5,569
Other non-interest income
581
670
1,870
1,921
Total non-interest income
3,780
(1,105)
12,922
8,864
Non-Interest Expense
Salaries and employee benefits
18,252
15,399
53,288
44,612
Occupancy
2,736
2,416
7,851
7,307
Professional of unearned fees
5805,796,599
618
2,453
2,538
Deposit insurance premiums
903
927
2,355
2,995
Data processing
877
700
2,849
2,136
Advertising
796
596
2,247
1,334
Software and communication
1,222
999
3,689
3,098
Foreclosed assets, net
9
(35)
(30)
680
Other non-interest expense
3,076
2,416
10,617
7,967
Total non-interest expense
28,451
24,036
85,319
72,667
Net Income Before Taxes
21,690
26,660
62,278
60,443
Income tax expense
4,410
5,660
12,625
11,831
Net Income
$
17,280
$
21,000
$
49,653
$
48,612
Basic Earnings Per Share
$
0.35
$
0.41
$
1.00
$
0.95
Diluted Earnings Per Share
$
0.35
$
0.41
$
0.99
$
0.93
(1)
For the three-
and nine-months ended September 30, 2021, this line represents the provision for
loan and lease losses. See further
discussion of this change in “Note 1: Nature of Operations and Summary of Significant Accounting Policies”
in the Notes to
Condensed Consolidated Financial Statements (unaudited).
See Notes to Condensed Consolidated Financial Statements (unaudited)
6
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
Net Income
$
17,280
$
21,000
$
49,653
$
48,612
Other Comprehensive Loss
Unrealized loss on available-for-sale securities
(39,299)
(7,989)
(137,282)
(11,532)
Less: income tax benefit
(9,621)
(1,956)
(33,607)
(2,823)
Unrealized loss on available-for-sale securities
(29,678)
(6,033)
(103,675)
(8,709)
Reclassification adjustment for realized gains (losses) included in
income
(4)
1,046
(43)
1,043
Less: income tax expense (benefit)
(1)
256
(11)
255
Less: reclassification adjustment for realized gain (loss) included
in income, net of income tax
(3)
790
(32)
788
Unrealized loss on cash flow hedges
(7,076)
-
(3,036)
-
Less: income tax expense
(1,731)
-
(741)
-
Unrealized loss on cash flow hedges, net of income tax
(5,345)
-
(2,295)
-
Other comprehensive loss
(35,020)
(6,823)
(105,938)
(9,497)
Comprehensive Income (Loss)
$
(17,740)
$
14,177
$
(56,285)
$
39,115
See Notes to Condensed Consolidated Financial Statements (unaudited)
7
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Common Stock
Treasury Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Total
Shares
Amount
(Dollars in thousands)
Balance at June 30, 2021
50,958,680
$
525
$
(20,000)
$
524,637
$
105,299
$
26,729
$
637,190
Net income
-
-
-
-
21,000
-
21,000
Other comprehensive loss
-
-
-
-
-
(6,823)
(6,823)
Issuance of shares from equity-based awards
44,018
1
-
(110)
-
-
(109)
Stock-based compensation
-
-
-
1,149
-
-
1,149
Balance at September 30, 2021
51,002,698
$
526
$
(20,000)
$
525,676
$
126,299
$
19,906
$
652,407
Common Stock
Treasury Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive Loss
Total
Shares
Amount
(Dollars in thousands)
Balance at June 30, 2022
49,535,949
$
529
$
(48,501)
$
528,548
$
176,868
$
(49,429)
$
608,015
Net income
-
-
-
-
17,280
-
17,280
Other comprehensive loss
-
-
-
-
-
(35,020)
(35,020)
Issuance of shares from equity-based awards
46,204
1
-
29
-
-
30
Open market common share repurchases
(794,457)
-
(10,827)
-
-
-
(10,827)
Stock-based compensation
-
-
-
1,069
-
-
1,069
Balance September 30, 2022
48,787,696
$
530
$
(59,328)
$
529,646
$
194,148
$
(84,449)
$
580,547
See Notes to Condensed Consolidated Financial Statements (unaudited)
8
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Common Stock
Treasury Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income
Total
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2020
51,679,516
$
523
$
(6,061)
$
522,911
$
77,652
$
29,403
$
624,428
Net income
-
-
-
-
48,612
-
48,612
Other comprehensive loss
-
-
-
-
-
(9,497)
(9,497)
Issuance of shares from equity-based awards
287,375
3
-
(608)
-
-
(605)
Open market common share repurchases
(964,193)
-
(13,939)
-
-
-
(13,939)
Employee receivables from sale of stock
-
-
-
-
35
-
35
Stock-based compensation
-
-
-
3,373
-
-
3,373
Balance at September 30, 2021
51,002,698
$
526
$
(20,000)
$
525,676
$
126,299
$
19,906
$
652,407
Common Stock
Treasury Stock
Additional
Paid-in Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss)
Total
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2021
50,450,045
$
526
$
(28,347)
$
526,806
$
147,099
$
21,489
$
667,573
Cumulative effect from changes in accounting
principle
(1)
-
-
-
-
(2,610)
-
(2,610)
Net income
-
-
-
-
49,653
-
49,653
Other comprehensive loss
-
-
-
-
-
(105,938)
(105,938)
Issuance of shares from equity-based awards
394,933
4
-
(631)
-
-
(627)
Open market common share repurchases
(2,090,782)
-
(30,981)
-
-
-
(30,981)
Employee receivables from sale of stock
-
-
-
-
6
-
6
Stock-based compensation
-
-
3,304
-
-
3,304
Exercise of warrants
33,500
-
-
167
-
-
167
Balance September 30, 2022
48,787,696
$
530
$
(59,328)
$
529,646
$
194,148
$
(84,449)
$
580,547
(1)
Includes the impact of implementing Accounting Standards Update (“ASU”)
2016-13, Financial Instruments - Credit Losses (Accounting Standard Codification
(“ASC”) 326):
Measurement of Credit Losses on Financial Instruments.
See “Note 1: Nature of Operations and Summary of Significant Accounting
Policies” in the Notes to Condensed
Consolidated Financial Statements (unaudited) for more information on the
Company’s adoption of this guidance
and the impact to the Company’s
results of operations.
See Notes to Condensed Consolidated Financial Statements (unaudited)
9
CROSSFIRST BANKSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Nine Months Ended
September 30,
2022
2021
(Dollars in thousands)
Operating Activities
Net income
$
49,653
$
48,612
Items not requiring (providing) cash
Depreciation and amortization
3,716
3,993
Provision for credit losses
(1)
4,844
1,000
Accretion of discounts and amortization of premiums on securities
3,259
3,876
Stock based compensation
3,304
3,373
Foreclosed asset impairment
-
630
Deferred income taxes
1,713
2,233
Net increase in bank owned life insurance
(1,200)
(3,088)
Net unrealized losses on equity securities
261
6,243
Net realized (gains) losses on available-for-sale securities
43
(1,043)
Changes in
Interest receivable
(4,530)
1,308
Other assets
3,802
(1,753)
Other liabilities
(2,989)
(541)
Net cash provided by operating activities
61,876
64,843
Investing Activities
Net change in loans
(425,494)
196,637
Purchases of available-for-sale securities
(82,305)
(168,705)
Proceeds from maturities of available-for-sale securities
29,587
83,546
Proceeds from sale of available-for-sale securities
-
15,923
Proceeds from the sale of foreclosed assets
237
628
Purchase of premises and equipment
(1,878)
(671)
Proceeds from the sale of premises and equipment and related insurance claims
-
547
Purchase of restricted equity securities
(6,957)
-
Proceeds from sale of restricted equity securities
10,111
3,143
Proceeds from death benefit on bank owned life insurance
-
3,483
Net cash provided by (used in) investing activities
(476,699)
134,531
Financing Activities
Net increase in demand deposits, savings, NOW and money market accounts
178,134
84,218
Net increase (decrease) in time deposits
125,784
(342,361)
Net decrease in fed funds purchased and repurchase agreements
-
(2,306)
Proceeds from Federal Home Loan Bank advances
50,000
-
Repayment of Federal Home Loan Bank advances
(149,000)
(16,500)
Net proceeds of Federal Home Loan Bank line of credit
67,748
-
Issuance of common shares, net of issuance cost
171
3
Proceeds from employee stock purchase plan
364
172
Repurchase of common stock
(30,981)
(13,939)
Acquisition of common stock for tax withholding obligations
(995)
(784)
Net decrease in employee receivables
6
35
Net cash provided by (used in) financing activities
241,231
(291,462)
Decrease in Cash and Cash Equivalents
(173,592)
(92,088)
Cash and Cash Equivalents, Beginning of Period
482,727
408,810
Cash and Cash Equivalents, End of Period
$
309,135
$
316,722
Supplemental Cash Flows Information
Interest paid
$
25,648
$
19,402
Income taxes paid
$
10,545
$
8,370
(1)
For the nine-months ended September 30, 2021, this line represents
the Provision for loan losses.
Notes to Condensed Consolidated Financial Statements
(unaudited)
10
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
CrossFirst Bankshares, Inc. (the “Company”) is a bank holding company whose principal activities
are the ownership and
management of its wholly-owned subsidiary, CrossFirst Bank (the
“Bank”). In addition, the Bank has
three
subsidiaries including
CrossFirst Investments, Inc. (“CFI”) that holds investments in marketable
securities, CFBSA I, LLC and CFBSA II, LLC.
The Bank is primarily engaged in providing a full range of banking and financial
services to individual and corporate customers
through its branches in: (i) Leawood, Kansas; (ii) Wichita, Kansas; (iii) Kansas City, Missouri;
(iv) Oklahoma City, Oklahoma; (v)
Tulsa, Oklahoma; (vi) Dallas, Texas; (vii) Frisco, Texas; and (viii) Phoenix, Arizona.
On June 13, 2022, the Company announced its entry into an agreement under
which the Bank will acquire Farmers & Stockmens
Bank, the bank subsidiary of Central Bancorp, Inc. (collectively, Farmers
& Stockmens Bank and Central Bancorp, Inc. are herein
referred as “Central”), for approximately $
75
million in cash. Central has branches in Colorado and New Mexico. The transaction is
currently expected to close in the fourth quarter of 2022, subject to the satisfaction
or waiver of customary closing conditions. Refer to
“Note 16: Subsequent Events” for further information about the acquisition.
Basis of Presentation
The Company’s accounting and reporting policies conform to accounting
principles generally accepted in the United States
(“GAAP”). The consolidated financial statements include the accounts of the Company,
the Bank, CFI, CFBSA I, LLC and CFBSA II,
LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
The condensed consolidated interim financial statements are unaudited. Certain
information and footnote disclosures presented in
accordance with GAAP have been condensed or omitted and should be read in conjunction with the Company’s
consolidated financial
statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2021 (the “2021
Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on
February 28, 2022.
In the opinion of management, the interim financial statements include all adjustments
which are of a normal, recurring nature
necessary for the fair presentation of the financial position, results of operations,
and cash flows of the Company. The consolidated
financial statements have been prepared in accordance with GAAP for interim financial information and the instructions
to Form 10-Q
adopted by the SEC.
Refer to the “accounting pronouncements implemented” below for
changes in the accounting policies
of the Company.
No
significant changes to the Company’s accounting policies, other
than those mentioned under “accounting pronouncements implemented”
below, have occurred since December 31, 2021, the most recent date
audited financial statements were provided within the Company’s
2021
Form 10-K. Operating results for the interim periods disclosed herein are not necessarily
indicative of the results that may be
expected for a full year or any future period.
Use of Estimates
The Company identified accounting policies and estimates that, due
to the difficult, subjective, or complex judgments and
assumptions inherent in those policies and estimates and the potential sensitivity
of the Company’s financial statements to those
judgments and assumptions, are critical to an understanding of the Company’s
financial condition and results of operations. Actual
results could differ from those estimates. The allowance for credit losses, deferred
tax asset, and fair value of financial instruments are
particularly susceptible to significant change.
Notes to Condensed Consolidated Financial Statements
(unaudited)
11
Cash Equivalents
The Company had $
205
million of cash and cash equivalents at the Federal Reserve Bank of Kansas City as of September
30,
2022.
Emerging Growth Company (“EGC”)
The Company is currently an EGC. An EGC may take advantage of reduced reporting requirements and is relieved of certain
other significant requirements that are otherwise generally applicable
to public companies. Among the reductions and reliefs, the
Company elected to extend the transition period for complying with new or revised
accounting standards affecting public companies.
This means that the financial statements the Company files or furnishes will not be
subject to all new or revised accounting standards
generally applicable to public companies for the transition period for
so long as the Company remains an EGC or until the Company
affirmatively and irrevocably opts out of the extended transition period
under the JOBS Act.
Accounting Pronouncements Implemented
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial
Instruments:
Background
– 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 Current Expected
Credit Loss (“CECL”) model requires an estimate of expected credit losses, measured
over the contractual life of an instrument,
that considers forecasts of future economic conditions in addition to information
about past events and current conditions. ASU
2016-13 requires new disclosures, including the use of vintage
analysis on the Company’s credit quality indicators.
In addition, ASU 2016-13 removes the available-for-sale (“AFS”) securities other-than-temporary-impairment model
that reduced
the cost basis of the investment and is replaced with an impairment model that
will recognize an allowance for credit losses on
available-for-sale securities.
Implementation
– The Company established a CECL committee to formulate and oversee the implementation process including
selection, implementation, and testing of third-party software.
The Company used a loss-rate ("cohort") method to estimate the expected allowance
for credit losses ("ACL") for all loan pools.
The cohort method identifies and captures the balance of a pool of loans with similar
risk characteristics, as of a particular point
in time to form a cohort, then tracks the respective losses generated by that cohort of loans over
their remaining lives, or until the
loans are “exhausted” (i.e., have reached an acceptable point in time at which
a significant majority of all losses are
expected to have been recognized). The cohort method closely aligned
with the Company's incurred loss model. This allowed the
Company to take advantages of the efficiencies of processes and procedures already
in practice.
The Company began parallel processing with the existing allowance
for loan losses model during the first quarter of 2019
recalibrating inputs as necessary. The Company formulated changes to policies, procedures,
disclosures, and internal controls that
were necessary to transition to the new standard. A third-party completed validation of the completeness, accuracy, and
reasonableness of the model in the fourth quarter of 2021. Refer to
“Note 4: Loans and Allowance for Credit Losses” for
additional information regarding the policies, procedures, and credit
quality indicators used by the Company.
Impact of adoption
– The Company adopted ASU 2016-13 on January 1, 2022 using the modified retrospective approach. All
disclosures as of and for the three-
and nine-month periods ended September 30, 2022 are presented in accordance
with ASC 326,
Financial Instruments-Credit Losses. The Company did not recast comparative
financial periods and has presented those
disclosures under previously applicable GAAP. Because the Company
chose the cohort method, the model must consider net
Notes to Condensed Consolidated Financial Statements
(unaudited)
12
deferred fees and costs. As a result, the Company transferred the previously disclosed unearned fees into the applicable loan
segments.
The Company used the prospective transition approach for AFS securities for which other-than-temporary-impairment
has been
recognized prior to January 1, 2022. As a result, the amortized cost basis remains the same before and after the effective date of
ASU 2016-13.
The following table illustrates the impact of adopting ASU 2016-13 and details how outstanding loan balances have been
reclassified because of changes made to the Company’s loan segments under
CECL:
January 1, 2022
As Reported under ASU
2016-13
Pre-ASU 2016-13
Impact of ASU 2016-13
Adoption
(Dollars in thousands)
Assets:
Loans (outstanding balance)
Commercial and Industrial
$
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)5,372,729
Allowance for credit losses on loans
56,62867,567
58,375
(1,747)61,775
Loans, net of the allowance for credit
losses on loans
4,199,5855,729,032
4,197,8385,310,954
1,747Premises and equipment, net
Deferred tax asset68,539
65,984
Restricted equity securities
13,060
12,536
Interest receivable
33,303
29,507
Foreclosed assets held for sale
-
1,130
Goodwill and other intangible assets, net
27,457
29,081
Bank-owned life insurance
69,929
69,101
Other
92,461
95,754
Total assets
$
13,6477,120,178
$
14,4746,601,086
Liabilities and stockholders’ equity
Deposits
Non-interest-bearing
$
(827)
Liabilities
Allowance for credit losses on off-balance
sheet exposures928,098
$
5,1841,400,260
$Savings, NOW and money market
-3,333,514
$3,305,481
5,184Time
Stockholders' equity1,838,455
Retained earnings945,567
$Total deposits
144,4896,100,067
$5,651,308
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.
Accounting Policies:
The Company updated the below accounting policies due to adoption of ASU 2016-13:
Notes to Condensed Consolidated Financial Statements
(unaudited)
13
Accrued Interest -
The Company made an accounting policy election to exclude accrued interest from
the amortized cost basis of loans. In addition,
the Company elected not to measure an allowance for credit losses for accrued
interest receivable, because a timely write-off
policy exists. The policy generally requires loans to be placed on non-accrual
when principal or interest is 90 days or more past
due unless the loan is well-secured and in the process of collection. A well-secured loan means that collateral or a guaranty has
sufficient value to pay off the loan in full. When a loan is placed on non-accrual, accrued
interest is reversed against interest
income.
The Company made a policy election to exclude accrued interest from
the amortized cost basis of AFS securities. AFS securities
are placed on non-accrual status when the Company no longer expects
to receive all contractual amounts due, which is generally
at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on non-accrual
status. Accordingly, the Company did not recognize an allowance for credit loss against accrued interest receivable.
Available-for-sale Securities in an Unrealized Loss Position –
For AFS securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more
likely than not
that it will be required to sell the security before recovery of its amortized cost basis. If
either of the criteria regarding
intent or
requirement to sell is met, the securities’ amortized cost basis is written down to fair value through income. For AFS securities
that do not meet the criteria above, the Company evaluates whether the decline
in fair value has resulted from credit losses or
other factors. Management considers the extent to which fair value is less than amortized
cost, any changes to the rating of the
security by a rating agency, and adverse conditions specifically related to
the security, among other factors.
If this assessment indicates that a credit loss exists, the present value of cash flows
expected to be collected from the security is
compared to the amortized cost basis of the security. If the present value of
cash flows expected to be collected is less than the
amortized cost basis, a credit loss exists and an allowance for credit losses is recorded
for the credit loss, limited by the amount
that the fair value is less than amortized cost basis.
ASU 2016-02, Leases (Topic 842):
Background
– ASU 2016-02 and its subsequent amendments require lessees to recognize the assets and liabilities that arise
from
such leases. This represents a change from previous GAAP that did not require operating leases to be recognized on the lessees’
balance sheet. The purpose
of Topic 842 is to increase transparency and comparability between organizations
that enter into lease
agreements.
The update modifies lease disclosure requirements as well.
On the lease commencement date (or on the date of adoption), a lessee is required
to measure and record a lease liability equal to
the present value of the remaining lease payments, discounted using an appropriate
discount rate. In addition, a right-of-use asset
is recorded that consists of the initial measurement of the lease liability adjusted for
certain payments, including lease incentives
received and initial direct costs.
For operating leases, after lease commencement, the lease liability is reported
at the present value of the unpaid lease payments
discounted using the discount rate established at lease commencement. The
lease expense is calculated by summing all future
lease payments in the lease term and lease incentives not yet recognized. The sum is then
amortized on a straight-line basis over
the lease term. The right-of-use asset is amortized as the difference between
the straight-line expense and the amortizing lease
liability.
Implementation
– The Company’s lease agreements to which Topic 842 has been applied primarily relate
to branch real estate
properties located in the Kansas City, Missouri; Tulsa, Oklahoma; Dallas, Texas; Frisco, Texas; and Phoenix, Arizona markets.
The remaining lease terms range from two to twenty years with potential renewal
terms. The leases include various payment
Notes to Condensed Consolidated Financial Statements
(unaudited)
14
terms including fixed payments with annual increases to variable payments.
In addition, several of the leases include lease
incentives.
The discount rates were not readily determinable in the lease agreements. As a result, the Company used the incremental
borrowing rate in accordance with Topic 842. The Company used the Federal Home Loan Bank (“FHLB”)advances
262,708
218,111
Other borrowings
14,320
35,457
Interest payable and other liabilities
91,600
87,611
Total liabilities
6,468,695
5,992,487
Stockholders’ equity
Preferred stock, $
0.01
 
yield curve as thepar value:
Authorized -
incremental borrowing rate.
The Company elected several practical expedients that are listed below:
15,000
Practical Expedient Elected
shares, issued -
Impact to Lease Accounting Implementation7,750
An entity need not reassess whether any expired
or existing contracts are or contain leases.
The Company was not required to re-evaluate previously identified leases,
including embedded leases, that existed as of the adoption date.
 
shares at
An entity need not reassess the lease classificationJune 30, 2023 and
for an expired or existing leases.no
 
The Company was not required to re-classify previously identified operating
leases that existed as of the adoption date. The Company did not have any
capital leases as ofshares at December 31, 2021.
An entity need not reassess initial direct costs for
any existing leases.
The Company was not required to review previously established lease
agreements as of the adoption date for initial direct costs. Initial direct costs
increase the right-of-use asset and do not impact the lease liability.
An entity may combine lease and non-lease
components.
If not elected, the Company would be required to allocate the total
consideration in a lease contract to lease and non-lease components based
on
their relative standalone price. The election results in higher right-of-use
assets and lease liabilities.
Short-term lease exemption.
The Company is not required to record a right-of-use asset and lease liability
for a lease whose term is 12 months or less and does not include a purchase
option that the lessee is reasonably certain to exercise.
Impact of Adoption
– The Company adopted ASU 2016-02 on January 1, 2022 using the modified retrospective approach. The
Company did not recast comparative financial periods and has presented
those disclosures under previously applicable GAAP.
The following table illustrates the impact of adopting ASU 2016-02 on the Company’s financial statements:
January 1, 2022
As Reported under ASU
2016-02
Pre-ASU 2016-02
Impact of ASU 2016-02
Adoption
(Dollars in thousands)
Assets:
Right-of-use asset
$
23,589
$
-
$
23,589
Liabilities:
Lease incentive
-
2,125
(2,125)
Accrued rent payable
-
904
(904)
Lease liability
$
26,618
$
-
$
26,618
Recent Accounting Pronouncements
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.
Notes to Condensed Consolidated Financial Statements
(unaudited)
15
In addition, the update requires disclosure of current-period gross charge
-offs by year of origination for financing receivables.
For the Company, the amendments are effective as of January 1, 2023, but early
adoption is permitted and would be applied as of
the beginning of the fiscal year of adoption.
Impact of adoption
– The Company anticipates adopting ASU 2022-02 as of January 1, 2023. At this time, an estimate of the
impact cannot be established.
Note 2: Earnings Per Share
The following table presents the computation of basic and diluted earnings per
share:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands except per share data)
Earnings per Share
Net income available to common stockholders
$
17,280
$
21,000
$
49,653
$
48,612
Weighted average common shares
49,266,811
50,990,113
49,755,184
51,368,957
Earnings per share
$
0.35
$
0.41
$
1.00
$
0.95
Diluted Earnings per Share
Net income available to common stockholders
$
17,280
$
21,000
$
49,653
$
48,612
Weighted average common shares
49,266,811
50,990,113
49,755,184
51,368,957
Effect of dilutive shares
454,682
615,608
525,409
699,257
Weighted average dilutive common shares
49,721,493
51,605,721
50,280,593
52,068,214
Diluted earnings per share
$
0.35
$
0.41
$
0.99
$
0.93
Stock-based awards not included because to do so would be
antidilutive
529,336
587,200
334,725
657,887
Note 3: Securities
The amortized cost and approximate fair values, together with gross unrealized
gains and losses, of period end available-for-sale
securities consisted of the following:
September 30, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
178,287
$
-
$
27,761
$
150,526
Collateralized mortgage obligations - GSE residential
12,489
-
752
11,737
State and political subdivisions
568,863
299
79,696
489,466
Corporate bonds
5,110
13
325
4,798
Total available-for-sale securities
$
764,749
$
312
$
108,534
$
656,527
Notes to Condensed Consolidated Financial Statements
(unaudited)
16
December 31, 2021
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
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
As of September 30, 2022, the available-for-sale securities had $
6
million of accrued interest, excluded from the amortized cost
basis.
The amortized cost and fair value of available-for-sale securities at September
30, 2022, by contractual maturity, are shown
below:
September 30, 2022
Within
After One to
After Five to
After
One Year
Five Years
Ten Years
Ten Years
Total
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
(1)
Amortized cost
$
-
$
24
$
105
$
178,158
$
178,287
Estimated fair value
$
-
$
23
$
101
$
150,402
$
150,526
Weighted average yield
(2)
-
%
4.78
%
4.01
%
2.06
%
2.06
%
Collateralized mortgage obligations -
GSE residential
(1)
Amortized cost
$
-
$
-
$
2,365
$
10,124
$
12,489
Estimated fair value
$
-
$
-
$
2,241
$
9,496
$
11,737
Weighted average yield
(2)
-
%
-
%
2.77
%
2.27
%
2.37
%
State and political subdivisions
Amortized cost
$
1,127
$
5,028
$
112,642
$
450,066
$
568,863
Estimated fair value
$
1,131
$
5,070
$
110,310
$
372,955
$
489,466
Weighted average yield
(2)
3.37
%
3.88
%
3.26
%
2.73
%
2.85
%
Corporate bonds
Amortized cost
$
-
$
498
$
4,612
$
-
$
5,110
Estimated fair value
$
-
$
501
$
4,297
$
-
$
4,798
Weighted average yield
(2)
-
%
6.22
%
4.31
%
-
%
4.49
%
Total available-for-sale securities
Amortized cost
$
1,127
$
5,550
$
119,724
$
638,348
$
764,749
Estimated fair value
$
1,131
$
5,594
$
116,949
$
532,853
$
656,527
Weighted average yield
(2)
3.37
%
4.09
%
3.29
%
2.53
%
2.66
%
(1)
Actual maturities may differ from contractual maturities because issuers may have
the rights to call or prepay obligations with or
without prepayment penalties.
(2)
Yields are calculated based on amortized cost.
Notes to Condensed Consolidated Financial Statements
(unaudited)
17
The following tables show the number of securities, unrealized loss, and fair value of
the Company’s investments with unrealized
losses, aggregated by investment class and length of time that individual
securities have been in a continuous unrealized loss position at
September 30, 2022 and December 31, 2021:
September 30, 2022
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
(Dollars in thousands)
Available-for-sale
securities
Mortgage-backed -
GSE residential
$
104,743
$
16,106
43
$
45,783
$
11,655
14
$
150,526
$
27,761
57
Collateralized
mortgage obligations
- GSE residential
11,430
740
18
307
12
1
11,737
752
19
State and political
subdivisions
410,905
55,588
344
48,255
24,108
39
459,160
79,696
383
Corporate bonds
4,535
325
4
-
-
-
4,535
325
4
Total temporarily
impaired securities
Common stock, $
531,613
$
72,759
409
$
94,345
$
35,775
54
$
625,958
$
108,534
463
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 securities
$
161,024
$
2,546
57
$
1,310
$
5
4
$
162,334
$
2,551
61
Based on the Company’s evaluation at September 30, 2022, under
the new impairment model, an allowance for credit losses has
no
t been recorded
no
r have unrealized losses been recognized into income. The issuers of the securities are of high
credit quality and
have a long history of no credit losses; management does not intend to sell, and
it is likely that management will not be required to sell
the securities prior to their anticipated recovery;
and the decline in fair value is largely attributed to changes in interest rates and other
market conditions. The issuers continue to make timely principal and interest
payments.
Notes to Condensed Consolidated Financial Statements
(unaudited)
18
The following tables show the gross gains and losses on securities that matured
or were sold:
0.01
 
par value:
Authorized -
For the Three Months Ended
For the Nine Months Ended
September 30, 2022
September 30, 2022
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
(Dollars in thousands)
Available-for-sale securities
$
1
$
(5)
$
(4)
$
3
$
(46)
$
(43)
For the Three Months Ended
For the Nine Months Ended
September 30, 2021
September 30, 2021
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
(Dollars in thousands)
Available-for-sale securities
$
1,125
$
(79)
$
1,046
$
1,151
$
(108)
$
1,043
Equity Securities
Equity securities consist of a $
2200,000,000
 
million investment in a Community Reinvestment Act (“CRA”) mutual fund and $shares, issued -
253,241,885
 
million inand
three private equity funds. Equity securities are included in “other assets” on
the Consolidated Balance Sheets.
The Company elected a measurement alternative for the three private
equity funds that allows the securities to remain at cost until
an impairment is identified or an observable price change for an identical
or similar investment of the same issuer occurs. Impairment is
recorded when there is evidence that the expected fair value of the
investment has declined to below the recorded cost. No such events
occurred during the three or nine-month periods ended September
30, 2022.
The following is a summary of the unrealized and realized gains and losses on equity
securities recognized in net income:
53,036,613
 
Three Months Ended
Nine Months Ended
Septembershares at June 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
Net gains (losses) recognized during the reporting period on equity securities
$
(87)
$
(6,210)
$
(261)
$
(6,243)
Less: net gains recognized during the reporting period on equity securities sold
during the reporting period
-
-
-
-
Unrealized gains (losses) recognized during the reporting period on equity
securities still held at the reporting date
$
(87)
$
(6,210)
$
(261)
$
(6,243)
Notes to Condensed Consolidated Financial Statements
(unaudited)
19
Note 4:
Loans and Allowance for Credit Losses
Loan Portfolio Segments
Categories of loans at September 30, 2022 2023 and December 31, 2021 include:2022,
respectively
532
530
Treasury stock, at cost:
4,588,398
shares held at June 30, 2023 and December 31,
2022
(64,127)
(64,127)
Additional paid-in capital
539,793
530,658
Retained earnings
238,147
206,095
Accumulated other comprehensive loss
(62,862)
(64,557)
Total stockholders’ equity
651,483
608,599
Total liabilities and stockholders’ equity
$
7,120,178
$
6,601,086
September 30, 2022
December 31, 2021
(Dollars in thousands)
Commercial and industrial
$
857,836
$
843,024
Commercial and industrial lines of credit
831,187
617,398
Energy
178,855
278,579
Commercial real estate
1,400,338
1,278,479
Construction and land development
674,041
574,852
Residential real estate
393,867
360,046
Multifamily real estate
275,795
240,230
Consumer
65,727
63,605
Loans, net of unearned fees
4,677,646
4,256,213
Less: allowance for credit losses
(1)
55,864
58,375
Loans, net
$
4,621,782
$
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 $
15
million and $
10
million at September 30, 2022 and December 31, 2021, respectively,
presented in “other
assets” on the Consolidated Balance Sheets is excluded from the amortized cost basis disclosed
in the above table.
The Company aggregates the loan portfolio by similar credit risk characteristics. The
loan segments are described in additional
detail below:
●
Commercial and Industrial
- 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 Small Business Administration (“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.
Notes to Condensed Consolidated Financial Statements
(unaudited)
20
●
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.
●
Consumer
- The category includes revolving lines of credit and various term loans such
as automobile loans and loans
for other personal purposes. Repayment is primarily dependent on
the personal income and credit rating of the
borrowers. Credit risk is driven by consumer economic factors (such as unemployment
and general economic conditions
in the borrower’s market area) and the creditworthiness of a borrower.
Allowance for Credit Losses
The Company established a CECL committee that meets at least quarterly to oversee the ACL methodology. The committee
estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions,
and reasonable and supportable forecasts. The ACL represents the Company’s current estimate of lifetime credit losses inherent in the
loan portfolio at the balance sheet date. The ACL is adjusted for expected prepayments when appropriate and excludes expected
extensions, renewals, and modifications.
The ACL is the sum of three components: (i) asset specific / individual loan reserves; (ii) quantitative (formulaic or pooled)
reserves; and (iii) qualitative (judgmental) reserves.
Asset Specific -
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.
Notes to Condensed Consolidated Financial Statements
(unaudited)
21
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.
Drivers of Change in the ACL
The ACL increased by less than $
0.1
million during the three-month period ended September 30, 2022 driven by an
increase of
$
2.1
million related to loan growth, performance and economic factors, partially offset by $
1.9
million in net charge-offs and a reduction
of $
0.2
million in reserves on impaired loans. The ACL decreased by $
2.5
million between January 1, 2022 and September 30, 2022
driven by $
4.1
million in net charge-offs and a reduction of $
5.8
million in reserves on impaired loans which were partially offset by an
increase of $
7.4
million related to loan growth, performance and economic factors.
Credit Quality Indicators
Internal Credit Risk Ratings
The Company uses a weighted average risk rating factor to adjust the historical
loss factors for current events. Risk ratings
incorporate the criteria utilized by regulatory authorities to describe criticized
assets, but separate various levels of risk concentrated
within the regulatory “Pass” category. Risk ratings are established for
loans at origination and are monitored on an ongoing basis. The
rating assigned to a loan reflects the risks posed by the borrower’s expected
performance and the transaction’s structure. Performance
metrics used to determine a risk rating include, but are not limited to, cash flow
adequacy, liquidity, and collateral. A description of the
loan risk ratings follows:
Loan Grades
●
Pass (risk rating 1-4)
- The category includes loans that are considered satisfactory. The category includes borrowers
that generally maintain good liquidity and financial condition, or
the credit is currently protected with sales trends
remaining flat or declining. Most ratios compare favorably with industry
norms and Company policies. Debt is
programmed and timely repayment is expected.
●
Special Mention (risk rating 5)
- The category includes borrowers that generally exhibit adverse trends in operations or
an imbalanced position in their balance sheet that has not reached a point where repayment
is jeopardized. Credits are
currently protected but, if left uncorrected, the potential weaknesses may
result in deterioration of the repayment
prospects for the credit or in the Company’s credit or lien position at a future date. These credits are
not adversely
classified and do not expose the Company to enough risk to warrant adverse
classification.
●
Substandard (risk rating 6)
- The category includes borrowers that generally exhibit well-defined weakness(es) that
jeopardize repayment. Credits are inadequately protected by the current worth
and paying capacity of the obligor or of
the collateral pledged. A distinct possibility exists that the Company will sustain some loss if deficiencies are not
corrected. Loss potential, while existing in the aggregate amount of substandard assets, does
not have to exist in
Notes to Condensed Consolidated Financial Statements
(unaudited)
22
individual assets classified substandard. Substandard loans include both
performing and non-performing loans and are
broken out in the table below.
●
Doubtful (risk rating 7)
- The category includes borrowers that exhibit weaknesses inherent in a substandard credit and
characteristics that these weaknesses make collection or liquidation in full highly
questionable or improbable based on
existing facts, conditions, and values. Because of reasonably specific pending
factors, which may work to the advantage
and strengthening of the assets, classification as a loss is deferred until its more
exact status may be determined.
●
Loss (risk rating 8)
- Credits which are considered uncollectible or of such little value that their continuance
as a
bankable asset is not warranted.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (unaudited)– Unaudited
235
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Operations – Unaudited
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
(Dollars in thousands except per share data)
Interest Income
Loans, including fees
$
98,982
$
47,327
$
188,600
$
90,055
Available-for-sale securities - taxable
2,622
1,086
4,471
2,130
Available-for-sale securities - tax-exempt
3,571
3,845
7,365
7,537
Deposits with financial institutions
1,609
369
3,623
521
Dividends on bank stocks
364
213
626
357
Total interest income
107,148
52,840
204,685
100,600
Interest Expense
Deposits
48,663
4,732
85,388
8,243
Fed funds purchased and repurchase agreements
-
74
46
74
Federal Home Loan Bank Advances
3,734
1,294
6,125
2,403
Other borrowings
212
31
366
56
Total interest expense
52,609
6,131
91,925
10,776
Net Interest Income
54,539
46,709
112,760
89,824
Provision for Credit Losses
2,640
2,135
7,061
1,510
Net Interest Income after Provision for Credit Losses
51,899
44,574
105,699
88,314
Non-Interest Income
The following tables present the credit risk profile of the Company’s loan portfolio
based on internal rating categories and loan segments:
 
AsService charges and fees on customer accounts
2,110
1,546
3,939
2,954
ATM and credit card interchange income
1,213
1,521
2,477
4,185
Realized gains (losses) on available-for-sale securities
-
(12)
63
(38)
Gain on sale of September 30, 2022loans
Amortized Cost Basis by Origination Year1,205
-
1,392
-
Gains (losses) on equity securities, net
6
(71)
16
(174)
Income from bank-owned life insurance
418
407
829
795
Swap fees and Internal Risk Ratingcredit valuation adjustments, net
Amortized Cost Basis84
202212
2021174
2020130
2019Other non-interest income
2018743
2017 and798
Prior1,310
Revolving
Loans
Revolving
Loans
converted to
Term Loans1,291
Total non-interest income
(Dollars in thousands)5,779
Commercial4,201
10,200
9,143
Non-Interest Expense
Salaries and industrialemployee benefits
Pass24,061
17,095
46,683
35,036
Occupancy
3,054
2,622
6,028
5,115
Professional fees
970
1,068
3,588
1,873
Deposit insurance premiums
1,881
713
3,412
1,450
Data processing
1,057
1,160
2,299
1,972
Advertising
649
757
1,401
1,449
Software and communication
1,655
1,198
3,306
2,468
Foreclosed assets, net
(21)
15
128
(38)
Other non-interest expense
3,304
4,555
7,035
7,505
Core deposit intangible amortization
802
20
1,624
39
Total non-interest expense
37,412
29,203
75,504
56,869
Net Income Before Taxes
20,266
19,572
40,395
40,588
Income tax expense
$
285,8804,219
$
287,9914,027
$
70,5918,240
$
55,1678,215
Net Income
$
55,66516,047
$
21,13415,545
$
-32,155
$
30,39232,373
Basic Earnings Per Common Share
$
806,820
Special mention
1,283
2,241
12,063
996
302
112
-
6,501
23,498
Substandard - accrual
-
455
1,485
2,165
758
46
-
20,416
25,325
Substandard - non-
accrual
-
104
-
6
1,383
700
-
-
2,193
Doubtful
-
-
-
-
-
-
-
-
-
Total0.33
$
287,1630.31
$
290,7910.66
$
84,1390.65
Diluted Earnings Per Common Share
$
58,3340.33
$
58,1080.31
$
21,9920.65
$
-
$
57,309
$
857,836
Commercial and industrial
lines of credit
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
780,710
$
-
$
780,710
Special mention
-
-
-
-
-
-
32,814
-
32,814
Substandard - accrual
-
-
-
-
-
-
11,188
-
11,188
Substandard - non-
accrual
-
-
-
-
-
-
6,475
-
6,475
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
-
$
-
$
-
$
-
$
-
$
-
$
831,187
$
-
$
831,187
Energy
Pass
$
7,446
$
403
$
246
$
-
$
7
$
-
$
156,119
$
188
$
164,409
Special mention
-
-
-
-
-
-
7,152
-
7,152
Substandard - accrual
-
-
-
-
-
-
2,131
-
2,131
Substandard - non-
accrual
-
-
-
-
-
-
3,375
-
3,375
Doubtful
-
-
-
-
-
-
1,788
-
1,788
Total
$
7,446
$
403
$
246
$
-
$
7
$
-
$
170,565
$
188
$
178,855
0.64
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (unaudited)– Unaudited
246
CROSSFIRST BANKSHARES, INC.
AsConsolidated Statements of SeptemberComprehensive Income (Loss) – Unaudited
Three Months Ended
Six Months Ended
June 30, 2022
Amortized Cost Basis by Origination Year and Internal Risk RatingJune 30,
Amortized Cost Basis2023
2022
20212023
2020
2019
2018
2017 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total2022
(Dollars in thousands)
Commercial real estate
PassNet Income
$
270,66916,047
$
259,29915,545
$
145,53032,155
$
110,15532,373
Other Comprehensive Income (Loss)
Unrealized (loss) gain on available-for-sale securities
(10,430)
(39,026)
4,521
(97,982)
Less: income tax (benefit) expense
(2,482)
(9,554)
1,175
(23,987)
Unrealized (loss) gain on available-for-sale securities, net of
income tax
(7,948)
(29,472)
3,346
(73,995)
Reclassification adjustment for realized (loss) gain included in
income
-
(12)
63
(38)
Less: income tax expense (benefit)
-
(3)
15
(9)
Less: reclassification adjustment for realized (loss) gain included
in income, net of income tax
-
(9)
48
(29)
Unrealized (loss) gain on cash flow hedges
(3,632)
1,385
(2,092)
4,040
Less: income tax expense (benefit)
(865)
339
(496)
992
Unrealized (loss) gain on cash flow hedges, net of income tax
(2,767)
1,046
(1,596)
3,048
Reclassification adjustment for interest income included in
income
9
-
9
-
Less: income tax expense
2
-
2
-
Less: reclassification adjustment for interest income included in
income, net of income tax
7
-
7
-
Other comprehensive (loss) income
(10,722)
(28,417)
1,695
(70,918)
Comprehensive Income (Loss)
$
67,9905,325
$(12,872)
74,46533,850
$
293,169
$
98,783
$
1,320,060
Special mention
11,927
9,870
-
422
6,280
290
2,420
33,086
64,295
Substandard - accrual
10,535
-
327
-
-
1,232
-
992
13,086
Substandard - non-
accrual
408
2,489
-
-
-
-
-
-
2,897
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
293,539
$
271,658
$
145,857
$
110,577
$
74,270
$
75,987
$
295,589
$
132,861
$
1,400,338
Construction and land development
Pass
$
205,062
$
290,753
$
126,364
$
24,323
$
3,663
$
1,367
$
14,679
$
-
$
666,211
Special mention
-
7,830
-
-
-
-
-
-
7,830
Substandard - accrual
-
-
-
-
-
-
-
-
-
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
205,062
$
298,583
$
126,364
$
24,323
$
3,663
$
1,367
$
14,679
$
-
$
674,041
Residential real estate
Pass
$
64,540
$
79,235
$
120,891
$
46,023
$
38,417
$
35,590
$
1,894
$
-
$
386,590
Special mention
253
3,290
-
231
-
-
-
-
3,774
Substandard - accrual
142
-
3,166
-
-
-
-
-
3,308
Substandard - non-
accrual
-
-
-
-
-
-
-
195
195
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
64,935
$
82,525
$
124,057
$
46,254
$
38,417
$
35,590
$
1,894
$
195
$
393,867
Notes to Condensed Consolidated Financial Statements (unaudited)
25
As of September 30, 2022
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Multifamily real estate
Pass
$
78,194
$
33,272
$
5,363
$
12,005
$
3,078
$
822
$
126,518
$
16,506
$
275,758
Special mention
-
-
-
-
-
-
-
37
37
Substandard - accrual
-
-
-
-
-
-
-
-
-
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
78,194
$
33,272
$
5,363
$
12,005
$
3,078
$
822
$
126,518
$
16,543
$
275,795
Consumer
Pass
$
11,629
$
2,512
$
1,914
$
221
$
110
$
30
$
49,311
$
-
$
65,727
Special mention
-
-
-
-
-
-
-
-
-
Substandard - accrual
-
-
-
-
-
-
-
-
-
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
11,629
$
2,512
$
1,914
$
221
$
110
$
30
$
49,311
$
-
$
65,727
Total
Pass
$
923,420
$
953,465
$
470,899
$
247,894
$
168,930
$
133,408
$
1,422,400
$
145,869
$
4,466,285
Special mention
13,463
23,231
12,063
1,649
6,582
402
42,386
39,624
139,400
Substandard - accrual
10,677
455
4,978
2,165
758
1,278
13,319
21,408
55,038
Substandard - non-
accrual
408
2,593
-
6
1,383
700
9,850
195
15,135
Doubtful
-
-
-
-
-
-
1,788
-
1,788
Total
$
947,968
$
979,744
$
487,940
$
251,714
$
177,653
$
135,788
$
1,489,743
$
207,096
$
4,677,646
(38,545)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (unaudited)– Unaudited
267
Loan Portfolio Aging AnalysisCROSSFIRST BANKSHARES, INC.
The following tables present the Company’s loan portfolio aging analysis asConsolidated Statements of September
30, 2022:
Stockholders’ Equity – Unaudited
Preferred Stock
As of September 30, 2022Common Stock
Amortized Cost Basis by Origination Year and Past Due StatusTreasury
Amortized Cost BasisStock
2022Additional
2021Paid-in
2020Capital
2019Retained
2018Earnings
2017 andAccumulated
PriorOther
RevolvingComprehensive
loans
Revolving
loans
converted to
term loansLoss
Total
Shares
Amount
Shares
Amount
(Dollars in thousands)
Commercial and industrial
30-59 days
$
600
$Balance at March 31, 2022
-
$
-
$
1549,728,253
$
-529
$
-(45,109)
$
-527,468
$
-161,323
$
615(21,012)
60-89 days$
623,199
Net income
-
-
-
-
-
-
15,545
-
15,545
Other comprehensive loss - available-for-
sale securities
-
-
-
-
-
-
-
-(29,463)
-(29,463)
Greater than 90 daysOther comprehensive gain - cash flow
-
124
7
75
1,383
655
-
-
2,244
Total past due
600
124
7
90
1,383
655
-
-
2,859
Current
286,563
290,667
84,132
58,244
56,725
21,337
-
57,309
854,977
Total
$
287,163
$
290,791
$
84,139
$
58,334
$
58,108
$
21,992
$
-
$
57,309
$
857,836
Greater than 90 days
and accruing
$
-
$
20
$
7
$
73
$
-
$
-
$
-
$
-
$
100
Commercial and industrial lines of credit
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
3,796
$
-
$
3,796
60-89 dayshedges
-
-
-
-
-
-
-
1,046
1,046
Issuance of shares from equity-based
awards
-
-
Greater than 90 days45,689
-
-
(40)
-
-
(40)
Open market common share repurchases
-
-
(237,993)
-
(3,392)
-
-
-
(3,392)
Stock-based compensation
-
-
-
-
-
1,120
-
-
1,120
Balance at June 30, 2022
-
$
-
49,535,949
$
529
$
(48,501)
$
528,548
$
176,868
$
(49,429)
$
608,015
Preferred Stock
Common Stock
Treasury
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shares
Amount
Shares
Amount
(Dollars in thousands)
Balance at March 31, 2023
7,750
$
-
48,600,618
$
532
$
(64,127)
$
539,023
$
222,203
$
(52,140)
$
645,491
Net income
-
-
-
-
-
-
1,56816,047
-
1,56816,047
Total past dueOther comprehensive loss - available-for-
-
-
-
-
-
-
5,364
-
5,364
Current
-
-
-
-
-
-
825,823
-
825,823
Total
$
-
$
-
$
-
$
-
$
-
$
-
$
831,187
$
-
$
831,187
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
83
$
-
$
83
Energy
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
60-89 dayssale securities
-
-
-
-
-
-
-
-(7,948)
-(7,948)
Greater than 90 daysOther comprehensive loss - cash flow
hedges
-
-
-
-
-
-
5,163(2,774)
(2,774)
Preferred dividends $
13.33
per share
-
5,163-
-
-
-
(103)
-
(103)
Issuance of shares from equity-based
awards
-
-
52,869
-
-
(77)
-
-
(77)
Warrants exercised, cash settled
-
-
-
-
-
(418)
-
-
(418)
Stock-based compensation
-
-
-
-
-
1,265
-
-
1,265
Balance June 30, 2023
7,750
$
-
48,653,487
$
532
$
(64,127)
$
539,793
$
238,147
$
(62,862)
$
651,483
Preferred Stock
Common Stock
Treasury
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total past due
Shares
Amount
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2021
-
$
-
50,450,045
$
526
$
(28,347)
$
526,806
$
147,099
$
21,489
$
667,573
Adoption of ASU 2016-13
-
-
-
-
-
-
5,163(2,610)
-
5,163(2,610)
Current
7,446
403
246Net income
-
7-
-
165,402
188
173,692
Total
$
7,446
$
403
$
246
$-
-
$-
7
$32,373
-
$32,373
170,565Other comprehensive loss - available-for-
$sale securities
188-
$-
178,855-
Greater than 90 days-
and accruing-
$-
-
(73,966)
(73,966)
Other comprehensive gain - cash flow
hedges
-
-
-
-
-
-
3,048
3,048
Issuance of shares from equity-based
awards
-
-
382,229
3
-
(493)
-
-
(490)
Open market common share repurchases
-
-
(1,296,325)
-
(20,154)
-
-
-
(20,154)
Employee receivables from sale of stock
-
-
-
-
-
-
6
-
6
Stock-based compensation
-
-
-
-
-
2,235
-
-
2,235
Balance at June 30, 2022
-
$
-
49,535,949
$
529
$
(48,501)
$
528,548
$
176,868
$
(49,429)
$
608,015
See Notes to Consolidated Financial Statements – Unaudited
8
Preferred Stock
Common Stock
Treasury
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shares
Amount
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2022
-
$
-
48,448,215
$
530
$
(64,127)
$
530,658
$
206,095
$
(64,557)
$
608,599
Net income
-
-
-
-
-
-
32,155
-
32,155
Other comprehensive gain -available-for-
sale securities
-
-
-
-
-
-
-
3,298
3,298
Other comprehensive loss - cash flow
hedges
-
-
-
-
-
-
(1,603)
(1,603)
Issuance of preferred shares
7,750
-
-
-
-
7,750
-
-
7,750
Preferred dividends $
13.33
per share
-
-
-
-
-
-
(103)
-
(103)
Issuance of shares from equity-based
awards
-
-
205,272
2
-
(700)
-
-
(698)
Warrants exercised, cash settled
-
-
-
-
-
(418)
-
-
(418)
Stock-based compensation
-
-
-
-
-
2,503
-
-
2,503
Balance June 30, 2023
7,750
$
-
$
-48,653,487
$
-532
$
-(64,127)
$
539,793
$
238,147
$
(62,862)
$
651,483
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
��
See Notes to Consolidated Financial Statements – Unaudited
9
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Cash Flows – Unaudited
Six Months Ended
June 30,
2023
2022
(Dollars in thousands)
Operating Activities
Net income
$
32,155
$
32,373
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization
4,642
2,474
Provision for credit losses
7,061
1,510
Accretion of discounts on loans
(1,371)
-
Accretion of discounts and amortization of premiums on securities
1,732
2,192
Equity based compensation
2,503
2,235
Gain on disposal of fixed assets
(67)
-
Loss on sale of foreclosed assets and related impairments
80
-
Gain on sale of loans
(1,392)
-
Origination of loans held for sale
(23,550)
-
Proceeds from sales of loans held for sale
23,368
-
Deferred income taxes
(79)
2,557
Net increase in bank owned life insurance
(829)
(795)
Net realized (gains) losses on available-for-sale securities
(63)
38
Dividends on FHLB stock
(625)
-
Changes in:
Interest receivable
(3,796)
(1,886)
Other assets
3,057
3,780
Other liabilities
3,373
(21,268)
Net cash provided by operating activities
46,199
23,210
Investing Activities
Net change in loans
(426,834)
(274,206)
Purchases of available-for-sale securities
(121,251)
(73,399)
Proceeds from maturities of available-for-sale securities
11,605
22,513
Proceeds from sale of available-for-sale securities
54,572
-
Proceeds from the sale of foreclosed assets
1,050
237
Purchase of premises and equipment
(5,251)
(1,135)
Proceeds from the sale of premises and equipment and related
insurance claims
67
13
Purchase of restricted equity securities
(11,953)
(4,208)
Proceeds from sale of restricted equity securities
12,062
1,544
Net cash used in investing activities
(485,933)
(328,641)
Financing Activities
Net decrease in demand deposits, savings, NOW and
money market accounts
(444,129)
(47,861)
Net increase in time deposits
892,782
108,684
Net (decrease) increase in fed funds purchased and repurchase agreements
(20,000)
6
Proceeds from Federal Home Loan Bank advances
22,414
50,000
Repayment of Federal Home Loan Bank advances
(70,201)
(130,000)
Net proceeds of Federal Home Loan Bank line of credit
94,696
140,000
Proceeds from issuance of preferred shares, net of issuance
cost
7,750
-
Issuance of common shares, net of issuance cost
2
170
Proceeds from employee stock purchase plan
167
364
Repurchase of common stock
-
(20,154)
Acquisition of common stock for tax withholding obligations
(867)
(833)
Settlement of warrants
(418)
-
Dividends paid on preferred stock
(103)
-
Net decrease in employee receivables
-
6
Net cash provided by financing activities
482,093
100,382
Increase (Decrease) in Cash and Cash Equivalents
42,359
(205,049)
Cash and Cash Equivalents, Beginning of Period
300,138
482,727
Cash and Cash Equivalents, End of Period
$
342,497
$
277,678
Supplemental Cash Flows Information
Interest paid
83,157
10,862
Income taxes paid
7,754
3,880
See Notes to Consolidated Financial Statements – Unaudited
10
11
CROSSFIRST BANKSHARES, INC.
Notes to Consolidated Financial Statements – Unaudited
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
CrossFirst Bankshares, Inc. (the “Company”) is a bank holding company whose principal activities
are the ownership and
management of its wholly-owned subsidiary, CrossFirst Bank (the
“Bank”). In addition, the Bank has
three
subsidiaries including
CrossFirst Investments, Inc. (“CFI”), which holds investments in marketable
securities, CFBSA I, LLC and CFBSA II, LLC.
The Bank is primarily engaged in providing a full range of banking and financial
services to individual and corporate customers
through its branches in: (i) Leawood, Kansas; (ii) Wichita, Kansas; (iii) Kansas City, Missouri;
(iv) Oklahoma City, Oklahoma; (v)
Tulsa, Oklahoma; (vi) Dallas, Texas; (vii) Fort Worth, Texas; (viii) Frisco, Texas; (ix) Phoenix, Arizona; (x) Colorado Springs,
Colorado; (xi) Denver, Colorado; and (xii) Clayton, New Mexico.
As described in "Note 16: Subsequent Events" below, the Company
added one full-service branch in Tucson, Arizona to the Company’s footprint on August 1, 2023 in connection with an acquisition
Basis of Presentation
The accompanying interim unaudited consolidated financial statements serve
to update the CrossFirst Bankshares, Inc. Annual
Report on Form 10-K for the year ended December 31, 2022 and include the accounts of
the Company, the Bank, CFI, CFBSA I, LLC
and CFBSA II, LLC. The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) and where applicable,
with general practices in the banking industry or guidelines
prescribed by bank regulatory agencies. However, they may not include
all information and notes necessary to constitute a complete set
of financial statements under GAAP applicable to annual periods and accordingly should be read
in conjunction with the financial
information contained in the Company's most recent Annual Report on Form 10-K. The unaudited consolidated financial statements
reflect all adjustments which are, in the opinion of management, necessary for a fair
statement of the results presented. All such
adjustments are of a normal recurring nature. All significant intercompany balances and transactions have
been eliminated in
consolidation. Certain reclassifications of prior years' amounts are made whenever
necessary to conform to current period presentation.
The results of operations for the interim period are not necessarily indicative of the
results that may be expected for the full year or any
other interim period. All amounts are in thousands, except share data, or as otherwise noted.
GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues
and expenses, and
disclosures of contingent assets and liabilities. By their nature, estimates are based on
judgment and available information. Management
has made significant estimates in certain areas, such as the fair values of financial
instruments, and the allowance for credit losses
(“ACL”). Because of the inherent uncertainties associated with any estimation
process and future changes in market and economic
conditions, it is possible that actual results could differ significantly from those estimates.
The Company's significant accounting policies followed in the preparation of
the unaudited consolidated financial statements are
disclosed in Note 1 of the audited financial statements and notes for the year ended
December 31, 2022 and are contained in the
Company's Annual Report on Form 10-K for that period. There have been no significant changes to the application of
significant
accounting policies since December 31, 2022
.
Related Party Transactions
The Bank 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 $
11
million and $
13
million while related party deposits totaled $
85
million and $
92
million at June 30, 2023 and December 31,
2022, respectively.
12
Note 2: 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:
June 30, 2023
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
297,941
$
216
$
25,224
$
272,933
Collateralized mortgage obligations - GSE residential
10,256
-
740
9,516
State and political subdivisions
504,236
464
51,751
452,949
Corporate bonds
9,749
-
1,247
8,502
Total available-for-sale securities
$
822,182
$
680
$
78,962
$
743,900
December 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
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
The carrying value of securities pledged as collateral was $
16
million and $
22
million at June 30, 2023 and December 31, 2022,
respectively.
As of June 30, 2023 and December 31, 2022, the available-for-sale securities had $
7
million and $
6
million, respectively of
accrued interest, excluded from the amortized cost basis, and presented
in “interest receivable” on the consolidated statements of
financial condition.
The following tables summarize the gross realized gains and losses from sales or maturities
of available-for-sale securities:
For the Three Months Ended
For the Six Months Ended
June 30, 2023
June 30, 2023
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Gain
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Gain
(Dollars in thousands)
Available-for-sale securities
$
74
$
(74)
$
-
$
267
$
(204)
$
63
For the Three Months Ended
For the Six Months Ended
June 30, 2022
June 30, 2022
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
(Dollars in thousands)
Available-for-sale securities
$
2
$
(14)
$
(12)
$
3
$
(41)
$
(38)
13
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 June 30, 2023 and December 31, 2022:
June 30, 2023
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
$
100,527
$
1,751
28
$
131,007
$
23,473
41
$
231,534
$
25,224
69
Collateralized
mortgage obligations
- GSE residential
-
-
-
9,515
740
19
9,515
740
19
State and political
subdivisions
123,696
1,366
111
275,023
50,385
195
398,719
51,751
306
Corporate bonds
4,380
621
1
4,122
626
4
8,502
1,247
5
Total temporarily
impaired securities
$
228,603
$
3,738
140
$
419,667
$
75,224
259
$
648,270
$
78,962
399
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 securities
$
462,659
$
48,392
330
$
118,806
$
35,509
57
$
581,465
$
83,901
387
Based on the Company’s evaluation at each respective period end,
we recorded
no
credit loss impairment during the six-months
ended June 30, 2023 or the year ended December 31, 2022.
The unrealized losses in the Company’s investment portfolio were caused
by interest rate changes.
As of June 30, 2023 the Company does not intend to sell the investments in loss positions, and it is not more
likely than not the Company will be required to sell the investments before
recovery of their amortized cost basis.
14
The amortized cost, fair value, and weighted average yield of available-for
-sale securities at June 30, 2023, by contractual
maturity, are shown below:
June 30, 2023
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
$
-
$
14
$
1,053
$
296,874
$
297,941
Estimated fair value
$
-
$
13
$
965
$
271,955
$
272,933
Weighted average yield
(2)
-
%
4.82
%
2.40
%
3.29
%
3.29
%
Collateralized mortgage obligations -
GSE residential
(1)
Amortized cost
$
-
$
-
$
2,296
$
7,960
$
10,256
Estimated fair value
$
-
$
-
$
2,165
$
7,351
$
9,516
Weighted average yield
(2)
-
%
-
%
2.77
%
2.34
%
2.43
%
State and political subdivisions
Amortized cost
$
1,068
$
5,900
$
91,244
$
406,024
$
504,236
Estimated fair value
$
1,076
$
5,966
$
90,275
$
355,632
$
452,949
Weighted average yield
(2)
3.55
%
4.32
%
3.10
%
2.72
%
2.81
%
Corporate bonds
Amortized cost
$
-
$
144
$
9,605
$
-
$
9,749
Estimated fair value
$
-
$
140
$
8,362
$
-
$
8,502
Weighted average yield
(2)
-
%
4.29
%
5.70
%
-
%
5.68
%
Total available-for-sale securities
Amortized cost
$
1,068
$
6,058
$
104,198
$
710,858
$
822,182
Estimated fair value
$
1,076
$
6,119
$
101,767
$
634,938
$
743,900
Weighted average yield
(2)
3.55
%
4.32
%
3.33
%
2.96
%
3.01
%
(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 30/360 day basis.
Tax-exempt securities are not tax effected.
Equity Securities
Equity securities consist of $
4
million of private equity investments as well as $
13
million of restricted equity securities. The
private equity investments are included in “other” assets on the
consolidated statements of financial condition.
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. No such events occurred
during the three- or six-month period ended June 30, 2023.
15
The following is a summary of the unrealized and realized gains and losses on equity
securities recognized in net income:
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
(Dollars in thousands)
Net gains (losses) recognized during the reporting period on equity securities
$
6
$
(71)
$
16
$
(174)
Less: net gains recognized during the reporting period on equity securities sold
during the reporting period
-
-
-
-
Unrealized gains (losses) recognized during the reporting period on equity
securities still held at the reporting date
$
6
$
(71)
$
16
$
(174)
16
Note 3:
Loans and Allowance for Credit Losses
The table below shows the loan portfolio composition including carrying value
by segment as of the dates shown. The carrying value of loans is net of discounts, fees, costs,
and fair value marks of $
23
million and $
24
million as of June 30, 2023 and December 31, 2022, respectively.
June 30, 2023
December 31, 2022
Amount
% of Loans
Amount
% of Loans
(Dollars in thousands)
Commercial and industrial
$
2,057,912
36
%
$
1,974,932
37
%
Energy
232,863
4
173,218
3
Commercial real estate - owner-occupied
542,827
9
437,119
8
Commercial real estate - non-owner-occupied
2,480,282
42
2,314,600
43
Residential real estate
439,434
8
439,367
8
Consumer
43,281
1
33,493
1
Loans, net of unearned fees
5,796,599
100
%
5,372,729
100
%
Less: allowance for credit losses on loans
(67,567)
(61,775)
Loans, net of the allowance for credit losses on loans
$
5,729,032
$
5,310,954
Accrued interest of $
26
million and $
23
million at June 30, 2023 and December 31, 2022, respectively, presented
in “interest receivable” on the consolidated statements of
financial condition is excluded from the carrying value disclosed in
the above table.
The Company aggregates the loan portfolio by similar credit risk characteristics.
Effective with the second quarter of 2023, we revised the reported
loan segments to better
reflect how management monitors the portfolio, assesses credit risk and
evaluates the ACL.
All prior period disclosures have been revised to reflect the changes to the loan
segments. The loan segments are described in additional detail below:
●
Commercial and Industrial
- The category includes loans and lines of credit to commercial and industrial clients for
use in property, plant, and equipment
purchases, business operations, expansions and for working capital
needs.
Loan terms typically require amortizing payments that decrease the outstanding
loan
balance while the lines of credit typically require interest-only payments with
maturities ranging from one-
to three-years. Lines of credit allow the borrower to draw
down and repay the line of credit based on the client’s cash flow needs. 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.
●
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 – Owner-Occupied
- The category includes relationships where we are usually the primary provider
of financial services for the company
and/or the principals and the primary source of repayment is through the
cash flows generated by the borrowers’ business operations. Owner-occupied commercial
real estate loans are typically secured by a first lien mortgage on real property
plus assignments of all leases related to the properties. Credit risk may be impacted
by
the creditworthiness of a borrower, property values and the local economies in the
borrower’s market areas.
●
Commercial Real Estate – Non-Owner-Occupied
- The category includes loans that typically involve larger principal amounts and repayment
of these loans is
generally dependent on the leasing income generated from tenants. These are viewed
primarily as cash flow loans and secondarily as loans secured by real estate.
17
Additionally, the category includes construction and land development
loans that are based upon estimates of costs and estimated value of the completed project.
Independent appraisals and a financial analysis of the developers and
property owners are completed. Sources of repayment include secondary market
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.
The category also includes loans that are secured by multifamily properties.
Repayment of these loans is primarily dependent on occupancy rates and rental income.
Credit risk for non-owner occupied commercial real estate loans 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. We also offer open
-
and closed-ended home equity loans, which are loans generally secured by
second lien positions on residential real estate.
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.
●
Consumer
- The category includes personal 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’s CECL committee 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
pooled reserves,
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
.
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.
18
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 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)
- The category includes loans that are considered satisfactory. The category includes borrowers that generally
maintain good liquidity and
financial condition, or the credit is currently protected with sales trends remaining
flat or declining. Most ratios compare favorably with industry norms and Company
policies. Debt is programmed and timely repayment is expected.
●
Special Mention (risk rating 5)
- The category includes borrowers that generally exhibit adverse trends in operations or an
imbalanced position in their balance
sheet that has not reached a point where repayment is jeopardized. Credits are currently
protected but, if left uncorrected, the potential weaknesses may result in
deterioration of the repayment prospects for the credit or in the Company’s
credit or lien position at a future date. These credits are not adversely classified and do not
expose the Company to enough risk to warrant adverse classification.
●
Substandard (risk rating 6)
- The category includes borrowers that generally exhibit well-defined weakness(es) that jeopardize
repayment. Credits are inadequately
protected by the current worth and paying capacity of the obligor or of the collateral
pledged. A
distinct possibility exists that the Company will sustain some loss if
deficiencies are not corrected. Loss potential, while existing in the aggregate
amount of substandard assets, does not have to exist in individual assets classified
substandard. Substandard loans include both performing and non-performing loans
and are broken out in the table below.
●
Doubtful (risk rating 7)
- The category includes borrowers that exhibit weaknesses inherent in a substandard credit and
characteristics that these weaknesses make
collection or liquidation in full highly questionable or improbable based
on existing facts, conditions, and values. Because of reasonably specific
pending factors,
which may work to the advantage and strengthening of the assets, classification as a loss is
deferred until its more exact status may be determined.
19
●
Loss (risk rating 8)
- Credits which are considered uncollectible or of such little value that their continuance
as a bankable asset is not warranted.
The following tables present the credit risk profile of the Company’s loan portfolio
based on internal rating categories and loan segments as of June 30, 2023 and December
31, 2022:
As of June 30, 2023
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2023
2022
2021
2020
2019
2018 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Commercial and industrial
Pass
$
283,048
$
306,846
$
207,224
$
60,219
$
44,139
$
43,384
$
946,803
$
37,305
$
1,928,968
Special mention
11,750
5,809
16,002
2,310
758
305
34,185
6,785
77,904
Substandard - accrual
1,419
64
67
157
983
844
20,303
17,610
41,447
Substandard - non-
accrual
-
-
(8)
57
-
-
8,511
1,033
9,593
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
296,217
$
312,719
$
223,285
$
62,743
$
45,880
$
44,533
$
1,009,802
$
62,733
$
2,057,912
Energy
Pass
$
-
$
7,278
$
105
$
192
$
-
$
-
$
224,677
$
143
$
232,395
Special mention
-
-
-
-
-
-
-
-
-
Substandard - accrual
-
-
-
-
-
-
-
-
-
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
468
-
468
Total
$
-
$
7,278
$
105
$
192
$
-
$
-
$
225,145
$
143
$
232,863
Commercial real estate
- owner-occupied
Pass
$
43,160
$
77,915
$
134,076
$
59,154
$
49,994
$
37,095
$
72,630
$
39,009
$
513,033
Special mention
10,311
5,847
5,905
431
1,196
5,267
-
-
28,957
Substandard - accrual
65
-
203
407
89
73
-
-
837
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
53,536
$
83,762
$
140,184
$
59,992
$
51,279
$
42,435
$
72,630
$
39,009
$
542,827
20
As of June 30, 2023
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2023
2022
2021
2020
2019
2018 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Commercial real estate - non-owner-
occupied
Pass
$
292,061
$
915,099
$
298,948
$
147,121
$
79,500
$
80,385
$
535,380
$
89,707
$
2,438,201
Special mention
-
-
7,528
137
16,398
4,154
-
33
28,250
Substandard - accrual
10,092
365
-
-
-
314
439
-
11,210
Substandard - non-
accrual
-
-
2,448
173
-
-
-
-
2,621
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
302,153
$
915,464
$
308,924
$
147,431
$
95,898
$
84,853
$
535,819
$
89,740
$
2,480,282
Residential real estate
Pass
$
19,066
$
76,723
$
86,898
$
115,256
$
39,976
$
67,055
$
26,962
$
-
$
431,936
Special mention
253
-
3,560
165
210
-
-
-
4,188
Substandard - accrual
-
-
-
3,125
-
-
-
-
3,125
Substandard - non-
accrual
-
-
-
-
-
-
-
185
185
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
19,319
$
76,723
$
90,458
$
118,546
$
40,186
$
67,055
$
26,962
$
185
$
439,434
Consumer
Pass
$
8,007
$
6,360
$
621
$
113
$
245
$
123
$
27,776
$
-
$
43,245
Special mention
-
-
-
-
-
7
-
-
7
Substandard - accrual
-
-
-
29
-
-
-
-
29
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
8,007
$
6,360
$
621
$
142
$
245
$
130
$
27,776
$
-
$
43,281
21
As of June 30, 2023
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2023
2022
2021
2020
2019
2018 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Total
Pass
$
645,342
$
1,390,221
$
727,872
$
382,055
$
213,854
$
228,042
$
1,834,228
$
166,164
$
5,587,778
Special mention
22,314
11,656
32,995
3,043
18,562
9,733
34,185
6,818
139,306
Substandard - accrual
11,576
429
270
3,718
1,072
1,231
20,742
17,610
56,648
Substandard - non-
accrual
-
-
2,440
230
-
-
8,511
1,218
12,399
Doubtful
-
-
-
-
-
-
468
-
468
Total
$
679,232
$
1,402,306
$
763,577
$
389,046
$
233,488
$
239,006
$
1,898,134
$
191,810
$
5,796,599
22
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
(Dollars in thousands)
Commercial and industrial
Pass
$
465,963
$
281,166
$
55,934
$
50,445
$
48,595
$
20,648
$
890,109
$
19,089
$
1,831,949
Special mention
2,531
23,055
14,573
2,951
4,947
86
49,861
41
98,045
Substandard - accrual
290
677
1,647
1,330
740
299
10,805
21,166
36,954
Substandard - non-
accrual
-
104
-
6
1,383
-
6,479
-
7,972
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
12
-
-
12
Total
$
468,784
$
305,002
$
72,154
$
54,732
$
55,665
$
21,045
$
957,254
$
40,296
$
1,974,932
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
- owner-occupied
Pass
$
79,695
$
127,489
$
56,607
$
49,620
$
28,143
$
20,299
$
28,814
$
14,024
$
404,691
Special mention
17,292
6,603
452
1,330
98
2,486
-
2,469
30,730
Substandard - accrual
-
-
403
-
-
1,295
-
-
1,698
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
96,987
$
134,092
$
57,462
$
50,950
$
28,241
$
24,080
$
28,814
$
16,493
$
437,119
23
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
(Dollars in thousands)
Commercial real estate
- non-owner-occupied
Pass
$
827,420
$
442,176
$
200,090
$
101,827
$
49,834
$
73,940
$
458,297
$
111,322
$
2,264,906
Special mention
5,931
7,727
114
-
6,460
1,853
2,429
9,852
34,366
Substandard - accrual
10,545
310
607
82
60
253
-
992
12,849
Substandard - non-
accrual
-
2,479
-
-
-
-
-
-
2,479
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
843,896
$
452,692
$
200,811
$
101,909
$
56,354
$
76,046
$
460,726
$
122,166
$
2,314,600
Residential real estate
Pass
$
77,416
$
84,158
$
121,078
$
45,265
$
37,395
$
34,852
$
31,892
$
-
$
432,056
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
$
31,892
$
191
$
439,367
Consumer
Pass
$
7,917
$
1,347
$
2,611
$
265
$
129
$
6
$
21,173
$
-
$
33,448
Special mention
-
-
-
-
8
-
-
-
8
Substandard - accrual
-
-
32
-
5
-
-
-
37
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
7,917
$
1,347
$
2,643
$
265
$
142
$
6
$
21,173
$
-
$
33,493
24
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
(Dollars in thousands)
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
25
Loan Portfolio Aging Analysis
The following tables present the Company’s loan portfolio aging analysis as of June
30, 2023 and December 31, 2022:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
27
As of SeptemberJune 30, 20222023
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2023
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Commercial real estateand industrial
30-59 days
$
408-
$
-
$
2
$
-
$
-
$
-
$
2,946
$
152
$
3,100
60-89 days
-
31
80
-
-
-
1,536
843
2,490
Greater than 90 days
-
7
-
205
-
-
7,293
-
7,505
Total past due
-
38
82
205
-
-
11,775
995
13,095
Current
296,217
312,681
223,203
62,538
45,880
44,533
998,027
61,738
2,044,817
Total
$
296,217
$
312,719
$
223,285
$
62,743
$
45,880
$
44,533
$
1,009,802
$
62,733
$
2,057,912
Greater than 90 days
and accruing
$
-
$
7
$
-
$
148
$
-
$
-
$
242
$
-
$
397
Energy
30-59 days
$
-
$
-
$
-
$
-
$
195-
$
-
$
-
$
603-
60-89 days$
-
-
-
-
-
1,032
-
-
1,032
Greater than 9060-89 days
-
-
-
-
-
-
-
-
-
Total past due
408Greater than 90 days
-
-
-
-
1,227-
-
468
-
468
Total past due
-
-
1,635-
-
-
-
468
-
468
Current
293,131-
271,6587,278
145,857105
110,577192
74,270-
74,760-
295,589224,677
132,861143
1,398,703232,395
Total
$
293,539-
$
271,6587,278
$
145,857105
$
110,577192
$
74,270-
$
75,987-
$
295,589225,145
$
132,861143
$
1,400,338232,863
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Construction and land development
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
10,629
$
-
$
10,629
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
-
-
-
-
10,629
-
10,629
Current
205,062
298,583
126,364
24,323
3,663
1,367
4,050
-
663,412
Total
$
205,062
$
298,583
$
126,364
$
24,323
$
3,663
$
1,367
$
14,679
$
-
$
674,041
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential real estate
30-59 days
$
142
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
142
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
120
-
-
-
-
-
-
120
Total past due
142
120
-
-
-
-
-
-
262
Current
64,793
82,405
124,057
46,254
38,417
35,590
1,894
195
393,605
Total
$
64,935
$
82,525
$
124,057
$
46,254
$
38,417
$
35,590
$
1,894
$
195
$
393,867
Greater than 90 days
and accruing
$
-
$
120
$
-
$
-
$
-
$
-
$
-
$
-
$
120
26
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
28
As of SeptemberJune 30, 20222023
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2023
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
MultifamilyCommercial real estate
- owner-occupied
30-59 days
$
-
$
-
$
203
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
60-89 days
4,566
-
-
-
-
-
-
-
4,566
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
4,566
-
-
-
-
-
-
-
4,566
Current
73,628
33,272
5,363
12,005
3,078
822
126,518
16,543
271,229
Total
$
78,194
$
33,272
$
5,363
$
12,005
$
3,078
$
822
$
126,518
$
16,543
$
275,795
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Consumer
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-203
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
-203
-
-
-
-
-
-203
Current
11,62953,536
2,51283,762
1,914139,981
22159,992
11051,279
3042,435
49,31172,630
-39,009
65,727542,624
Total
$
11,62953,536
$
2,51283,762
$
1,914140,184
$
22159,992
$
11051,279
$
3042,435
$
49,31172,630
$
-39,009
$
65,727542,827
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
TotalCommercial real estate - non-owner-occupied
30-59 days
$
1,150
$
-
$
-
$
15
$
-
$
195
$
14,425
$
-
$
15,785
60-89 days
4,566
-
-
-
-
1,032
-
-
5,598
Greater than 90 days
-
244
7
75
1,383
655
6,731
-
9,095
Total past due
5,716
244
7
90
1,383
1,882
21,156
-
30,478
Current
942,252
979,500
487,933
251,624
176,270
133,906
1,468,587
207,096
4,647,168
Total
$
947,968
$
979,744
$
487,940
$
251,714
$
177,653
$
135,788
$
1,489,743
$
207,096
$
4,677,646
Greater than 90 days
and accruing
$
-
$
140
$
7
$
73
$
-
$
-
$
83
$
-
$
303
Notes to Condensed Consolidated Financial Statements (unaudited)
29
Non-accrual Loan Analysis
Non-accrual loans are loans for which the Company does not record interest
income. The accrual of interest on loans is discontinued at the time the loan is 90 days past due
unless the credit is well secured and in process of collection. Past due status is based on
contractual terms of the loan. In all cases, loans are placed on non-accrual or
charged off at
an earlier date, if collection of principal or interest is considered doubtful. Loans
are returned to accrual status when all the principal and interest amounts contractually due
are
brought current and future payments are reasonably assured. The following
table presents the Company’s non-accrual
loans by loan segments:
As of September 30, 2022
Amortized Cost Basis by Origination Year and On Non-accrual
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted
to term
loans
Total Non-
accrual
Loans
Non-accrual
Loans with no
related
Allowance
(Dollars in thousands)
Commercial and industrial
$
-
$
104
$
-
$
6
$
1,383
$
700
$
-
$
-
$
2,193-
$60-89 days
2,193-
Commercial and industrial-
lines of credit6,029
-
-
-
-
-
-6,029
6,475
-
6,475
6,475
Energy
-
-
-
-
-
-
5,163
-
5,163
3,587
Commercial real estate
408
2,489
-
-
-
-
-
-
2,897
2,897
Construction and land
development
-
-
-
-
-
-
-
-
-
-
Residential real estate
-
-
-
-
-
-
-
195
195
195
Multifamily real estate
-
-
-
-
-
-
-
-
-
-
Consumer
-Greater than 90 days
-
-
-
-
-
-
-
-
-
Total
$
408
$
2,593
$ past due
-
$
6
$
1,383
$
700
$
11,638
$
195
$
16,923
$
15,347
Interest income recognized on non-accrual loans was $
0.9
million and $
1.3
million for the three- and nine-month periods ended September 30,
2022, respectively.
Notes to Condensed Consolidated Financial Statements (unaudited)
30
Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses and
allowance for credit losses on off-balance sheet credit exposures by portfolio
segment for the
three-month period ended September 30, 2022:
For the Three Months Ended September 30, 2022
Commercial
and Industrial
Commercial
and
Industrial
Lines of
Credit
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
Real Estate
Multifamily
Real Estate
Consumer
Total
(Dollars in thousands)
Allowance for Credit Losses:
Beginning balance
$
10,920
$
11,267
$
6,428
$
17,042
$
3,918
$
3,134
$
2,427
$
681
$
55,817
Charge-offs
-
(2,000)
(642)6,029
-
-
-
-
-
(2,642)6,029
RecoveriesCurrent
302,153
915,464
302,895
147,431
95,898
84,853
535,819
89,740
2,474,253
Total
$
302,153
$
915,464
$
308,924
$
147,431
$
95,898
$
84,853
$
535,819
$
89,740
$
2,480,282
Greater than 90 days
and accruing
$
-
9$
-
748$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential real estate
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
176
$
-
$
176
60-89 days
-
-
1,320
-
-
-
9
766
Provision (credit)
417
2,781
(958)
(1,335)
669
103
246-
-
1,9231,320
Ending balanceGreater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
1,320
-
-
-
176
-
1,496
Current
19,319
76,723
89,138
118,546
40,186
67,055
26,786
185
437,938
Total
$
11,33719,319
$
12,05776,723
$
4,82890,458
$
16,455118,546
$
4,58740,186
$
3,23767,055
$
2,67326,962
$
690185
$
55,864439,434
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:Greater than 90 days
Beginning balance
$
63and accruing
$
-
$
470
$
657
$
4,016
$
4
$
109
$
1
$
5,320
Provision (credit)
34
-
78
19
1,304
(2)
(25)
3
1,411
Ending balance
$
97
$
-
$
548-
$
676-
$
5,320-
$
2-
$
84-
$
4
$
6,731-
27
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table
As of ContentsJune 30, 2023
Notes to Condensed Consolidated Financial Statements (unaudited)Amortized Cost Basis by Origination Year and Past Due Status
31Amortized Cost Basis
2023
For the Nine Months Ended September 30, 2022
Commercial2021
2020
2019
2018 and
IndustrialPrior
(1)Revolving
Commercialloans
andRevolving
Industrialloans
Lines ofconverted to
Credit
(1)
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
Real
Estate
(2)
Multifamily
Real
Estate
(2)
Consumerterm loans
Total
(Dollars in thousands)
Allowance for Credit Losses:Consumer
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)
Charge-offs
(790)
(3,971)
(4,609)
(1,102)
-
(217)
-
(13)
(10,702)
Recoveries
755
1,788
1,754
2,333
-
-
-
11
6,641
Provision (credit)
1,233
5,374
(1,507)
(3,709)
921
408
208
369
3,297
Ending balance
$
11,337
$
12,057
$
4,828
$
16,455
$
4,587
$
3,237
$
2,673
$
690
$
55,864
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:
Beginning balance, prior to
adoption of ASU 2016-1330-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Impact of ASU 2016-1360-89 days
adoption-
107
44
265
711
3,914
5
137-
1
5,18414
Provision (credit)-
(10)-
(44)-
283-
(35)15
1,406Greater than 90 days
(3)-
(53)36
3-
1,547-
Ending balance-
-
-
-
36
Total past due
-
36
1
14
-
-
-
-
51
Current
8,007
6,324
620
128
245
130
27,776
-
43,230
Total
$
978,007
$
6,360
$
621
$
142
$
245
$
130
$
27,776
$
-
$
54843,281
Greater than 90 days
and accruing
$
676-
$
5,32036
$
-
$
-
$
-
$
-
$
-
$
-
$
36
Total
30-59 days
$
-
$
-
$
205
$
-
$
-
$
-
$
3,122
$
152
$
3,479
60-89 days
-
31
7,430
14
-
-
1,536
843
9,854
Greater than 90 days
-
43
-
205
-
-
7,761
-
8,009
Total past due
-
74
7,635
219
-
-
12,419
995
21,342
Current
679,232
1,402,232
755,942
388,827
233,488
239,006
1,885,715
190,815
5,775,257
Total
$
679,232
$
1,402,306
$
763,577
$
389,046
$
233,488
$
239,006
$
1,898,134
$
191,810
$
5,796,599
Greater than 90 days
and accruing
$
-
$
43
$
-
$
148
$
-
$
-
$
242
$
-
$
433
28
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
$
2,814
$
-
$
8,667
60-89 days
-
55
-
-
-
-
980
430
1,465
Greater than 90 days
-
143
7
6
1,383
12
7,063
-
8,614
Total past due
20
4,982
7
6
1,383
1,061
10,857
430
18,746
Current
468,764
300,020
72,147
54,726
54,282
19,984
946,397
39,866
1,956,186
Total
$
468,784
$
305,002
$
72,154
$
54,732
$
55,665
$
21,045
$
957,254
$
40,296
$
1,974,932
Greater than 90 days
and accruing
$
-
$
39
$
7
$
-
$
-
$
-
$
584
$
-
$
630
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
- owner-occupied
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
-
-
-
-
-
-
-
Current
96,987
134,092
57,462
50,950
28,241
24,080
28,814
16,493
437,119
Total
$
96,987
$
134,092
$
57,462
$
50,950
$
28,241
$
24,080
$
28,814
$
16,493
$
437,119
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
29
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 real estate
- non-owner-occupied
30-59 days
$
4,293
$
-
$
-
$
1,180
$
-
$
-
$
-
$
-
$
5,473
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
4,293
-
-
1,180
-
-
-
-
5,473
Current
839,603
452,692
200,811
100,729
56,354
76,046
460,726
122,166
2,309,127
Total
$
843,896
$
452,692
$
200,811
$
101,909
$
56,354
$
76,046
$
460,726
$
122,166
$
2,314,600
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential real estate
30-59 days
$
-
$
3,867
$
-
$
10
$
-
$
-
$
30
$
-
$
3,907
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
120
-
-
-
-
-
-
120
Total past due
-
3,987
-
10
-
-
30
-
4,027
Current
77,703
83,443
124,413
45,481
37,395
34,852
31,862
191
435,340
Total
$
77,703
$
87,430
$
124,413
$
45,491
$
37,395
$
34,852
$
31,892
$
191
$
439,367
Greater than 90 days
and accruing
$
-
$
120
$
-
$
-
$
-
$
-
$
-
$
-
$
120
Consumer
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
60-89 days
-
-
2
-
5
-
-
-
7
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
2
-
5
-
-
-
7
Current
7,917
1,347
2,641
265
137
6
21,173
-
33,486
Total
$
7,917
$
1,347
$
2,643
$
265
$
142
$
6
$
21,173
$
-
$
33,493
30
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)
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
31
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
tables present the Company’s non
-accrual loans by loan segments at June 30, 2023 and December 31,
2022:
As of June 30, 2023
Amortized Cost Basis by Origination Year and On Non-accrual
Amortized Cost Basis
2023
2022
2021
2020
2019
2018 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
$
-
$
-
$
-
$
57
$
-
$
-
$
8,503
$
1,033
$
9,593
$
6,991
Energy
-
-
-
-
-
-
468
-
468
468
Commercial real estate -
owner-occupied
-
-
-
-
-
-
-
-
-
-
Commercial real estate -
non-owner-occupied
-
-
2,448
173
-
-
-
-
2,621
2,621
Residential real estate
-
-
-
-
-
-
-
185
185
185
Consumer
-
-
-
-
-
-
-
-
-
-
Total
$
-
$
-
$
2,448
$
230
$
-
$
-
$
8,971
$
1,218
$
12,867
$
10,265
32
As of December 31, 2022
Amortized Cost Basis by Origination Year and On Non-accrual
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted
to term
loans
Total Non-
accrual
Loans
Non-accrual
Loans with no
related
Allowance
(Dollars in thousands)
Commercial and industrial
$
-
$
104
$
-
$
6
$
1,383
$
12
$
6,479
$
-
$
7,984
$
7,984
Energy
-
-
-
-
-
-
618
-
618
618
Commercial real estate -
owner-occupied
-
-
-
-
-
-
-
-
-
-
Commercial real estate -
non-owner-occupied
-
2,479
-
-
-
-
-
-
2,479
2,479
Residential real estate
-
-
-
-
-
-
-
191
191
191
Consumer
-
-
-
-
-
-
-
-
-
-
Total
$
-
$
2,583
$
-
$
6
$
1,383
$
12
$
7,097
$
191
$
11,272
$
11,272
Interest income recognized on non-accrual loans was $
0.1
million and $
0.3
million for the three- and six-months ended June 30, 2023, respectively.
For the three-and six-months
ended June 30, 2022, the interest income recognized on non-accrual loans
was $
0.3
million and $
0.4
million, respectively.
33
Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses and
allowance for credit losses on off-balance sheet credit exposures by portfolio
segment for the
three- and six-months ended June 30, 2023:
For the Three Months Ended June 30, 2023
Commercial
and Industrial
Energy
Commercial
Real Estate -
Owner-
occupied
Commercial
Real Estate -
Non-owner-
occupied
Residential
Real Estate
Consumer
Total
(Dollars in thousands)
Allowance for Credit Losses:
Beginning balance
$
27,660
$
4,679
$
5,610
$
23,807
$
3,265
$
109
$
65,130
Charge-offs
(738)
-
-
-
-
(5)
(743)
Recoveries
3
137
-
-
-
-
140
Provision
2,004
98
751
174
3
10
3,040
Ending balance
$
28,929
$
4,914
$
6,361
$
23,981
$
3,268
$
114
$
67,567
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:
Beginning balance
$
461
$
541
$
226
$
6,819
$
59
$
7
$
8,113
Provision (release)
(12)
(45)
(21)
(323)
8
(7)
(400)
Ending balance
$
449
$
496
$
205
$
6,496
$
67
$
-
$
7,713
34
For the Six Months Ended June 30, 2023
Commercial
and Industrial
Energy
Commercial
Real Estate -
Owner-
occupied
Commercial
Real Estate -
Non-owner-
occupied
Residential
Real Estate
Consumer
Total
(Dollars in thousands)
Allowance for Credit Losses:
Beginning balance
$
26,803
$
4,396
$
5,214
$
21,880
$
3,333
$
149
$
61,775
Charge-offs
(2,380)
-
-
-
-
(5)
(2,385)
Recoveries
4
137
-
-
-
-
141
Provision (release)
4,502
381
1,147
2,101
(65)
(30)
8,036
Ending balance
$
28,929
$
4,914
$
6,361
$
23,981
$
3,268
$
114
$
67,567
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:
Beginning balance
$
319
$
787
$
221
$
7,323
$
35
$
3
$
8,688
Provision (release)
130
(291)
(16)
(827)
32
(3)
(975)
Ending balance
$
449
$
496
$
205
$
6,496
$
67
$
-
$
7,713
The ACL increased $
2.4
million during the quarter.
Provision expense of $
3.0
million was driven primarily by loan growth, and was partially offset by $
0.6
million in net
charge-offs, primarily due to two commercial and industrial loans.
The reserve on unfunded commitments decreased $
0.4
million due to a decrease in unfunded commitments in the
quarter.
The ACL increased $
5.8
million during the six-months ended June 30, 2023 and included provision
of $
8.0
million due to loan growth and changes in credit quality and
economic factors and an increase in reserves on impaired loans of $
0.8
million, partially offset by $
2.2
million in net charge-offs.
The reserve on unfunded commitments decreased
$
1.0
million due to a decrease in unfunded commitments.
35
The following tables presents the Company’s gross charge-offs by year of
origination for the three- and six-months ended June 30, 2023:
For the Quarter Ended June 30, 2023
Gross Charge-offs by Origination Year
Gross Charge-offs
2023
2022
2021
2020
2019
2018 and
Prior
Revolving
loans
Revolving
loans
converted
to term
loans
Gross
Charge-
offs
(Dollars in thousands)
Commercial and industrial
$
6
$
-
$
2
$
84-
$
4-
$
6,73111
(1)$
569
$
150
$
738
Energy
-
-
-
-
-
-
-
-
-
Commercial real estate - owner-occupied
-
-
-
-
-
-
-
-
-
Commercial real estate - non-owner-occupied
-
-
-
-
-
-
-
-
-
Residential real estate
-
-
-
-
-
-
-
-
-
Consumer
-
-
-
-
-
5
-
-
5
Total
$
6
$
-
$
2
$
-
$
-
$
16
$
569
$
150
$
743
For the Six Months Ended June 30, 2023
Gross Charge-offs by Origination Year
Gross Charge-offs
2023
2022
2021
2020
2019
2018 and
Prior
Revolving
loans
Revolving
loans
converted
to term
loans
Gross
Charge-
offs
(Dollars in thousands)
Commercial and industrial
$
6
$
-
$
72
$
-
$
-
$
1,358
$
569
$
375
$
2,380
Energy
-
-
-
-
-
-
-
-
-
Commercial real estate - owner-occupied
-
-
-
-
-
-
-
-
-
Commercial real estate - non-owner-occupied
-
-
-
-
-
-
-
-
-
Residential real estate
-
-
-
-
-
-
-
-
-
Consumer
-
-
-
-
-
5
-
-
5
Total
$
6
$
-
$
72
$
-
$
-
$
1,363
$
569
$
375
$
2,385
 
36
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 June 30, 2023 and December 31, 2022:
As of June 30, 2023
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
$
7,984
$
883
$
6,065
Energy
Oil and natural gas properties
468
-
468
Commercial real estate - owner-occupied
Commercial real estate properties
-
-
-
Commercial real estate - non-owner-
occupied
Commercial real estate properties
-
-
-
Residential real estate
Residential real estate properties
-
-
-
Consumer
Vehicles & other personal assets
-
-
-
$
8,452
$
883
$
6,533
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
$
7,981
$
-
$
7,981
Energy
Oil and natural gas properties
618
-
618
Commercial real estate - owner-occupied
Commercial real estate properties
-
-
-
Commercial real estate - non-owner-
occupied
Commercial real estate properties
92
-
92
Residential real estate
Residential real estate properties
-
-
-
Consumer
Vehicles & other personal assets
39
22
-
$
8,728
$
22
$
8,689
Loan Modifications
The Company considers loans to borrowers experiencing financial difficulties
to be troubled loans.
Effective January 1, 2023, the
Company adopted ASU 2022-02, which eliminates the accounting guidance for troubled debt restructurings
(“TDR”) and requires an
entity evaluate whether loan modifications represent a new loan or
a continuation of an existing loan.
Such troubled debt modifications
(“TDM”) may include principal forgiveness, interest rate reductions,
other-than-insignificant-payment delays, term extensions or any
combination thereof.
The Company adopted this accounting standard on a prospective basis.
37
During the three- and six-months ended June 30, 2023, the Company modified
three
loans with an amortized cost basis of
$
4.7
million to facilitate repayment that are considered TDMs.
The following table presents, by loan segment, the amortized cost basis
as of the date shown for modified loans to borrowers experiencing financial difficulty:
June 30, 2023
Term Extension
Amortized Cost Basis
% of Loan Class
(Dollars in thousands)
Commercial and industrial
$
4,607
0.2
%
Commercial real estate - owner-occupied
65
0.0
Total Loans
$
4,672
The following schedule presents the payment status, by loan class, as of
June 30, 2023, of the amortized cost basis of loans that
have been modified since January 1, 2023:
June 30, 2023
Current
(Dollars in thousands)
Commercial and industrial
$
4,607
Commercial real estate - owner-occupied
65
Total Loans
$
4,672
The Company had no TDMs that were modified and had defaulted on their modified terms during
the six-months ended June 30,
2023. For purposes of this disclosure, the Company considers “default” to mean
90 days or more past due on principal or interest. The
allowance for credit losses related to TDMs on non-accrual status is determined by
individual evaluation, including collateral adequacy,
using the same process as loans on non-accrual status which are not
classified as TDMs.
The following schedule presents the financial effect of the modifications
made to borrowers experiencing financial difficulty as of
June 30, 2023:
June 30, 2023
Financial Effect
Term Extension
Commercial and industrial
Added a weighted average
1.2
years to the life of loan, which reduced
monthly payment amounts
Commercial real estate - owner-occupied
Added a weighted average
0.6
years to the life of loan, which reduced
monthly payment amounts
Troubled Debt Restructurings
Prior to the adoption of ASU 2016-13, the Commercial and industrial and Commercial and industrial lines of credit2022-02, TDRs were extended to borrowers who were experiencing financial difficulty
 
were consolidated under the Commercial and industrialwho had
segment.
(2)
been granted a concession, excluding loan modifications as a result of
 
Priorthe COVID-19 pandemic. The modification of terms typically
included
the extension of maturity, reduction or deferment of monthly payment, or reduction
of the stated interest rate.
The outstanding balance of TDRs recognized prior to the adoption of ASU 2016-13,2022-02 was $
28.4
million and $
30.5
million as of
June 30, 2023 and December 31, 2022, respectively.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses for off-balance sheet credit
exposures unless the Residential real estateobligation 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 Multifamily real estate segmentsincludes consideration of the
likelihood that funding will occur and an estimate of the
38
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 $
8
million and $
9
million allowance for
credit losses on off-balance sheet credit exposures at June 30, 2023 and December
31, 2022, respectively, are included in “interest
payable and other liabilities” on the statements 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.
Note 4:
Leases
The Company’s leases primarily include bank branches located
in Kansas City, Missouri; Tulsa, Oklahoma; Dallas, Texas; Frisco,
Texas; Phoenix, Arizona;
Denver, Colorado and Colorado Springs, Colorado. The remaining lease terms on these branch
leases range
from less than
one year
to
nineteen 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 June 30, 2023, the Company recognized one finance lease and the
remaining Company leases are classified as
operating leases.
During the second quarter of 2023, the Company entered into a lease agreement
for a new bank branch in Oklahoma City,
Oklahoma.
The lease is expected to commence at the beginning of 2025. The lease will be recognized
in the Company’s consolidated
financial statements during the period that includes the lease’s commencement
date.
The ROU asset is included in “other assets” on the consolidated statements of
financial condition, and was $
29
million and $
31
million at June 30, 2023 and December 31, 2022, respectively. 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
statements of financial condition and was $
32
million and $
34
million at June 30, 2023 and December 31, 2022, respectively.
As of June 30, 2023, the remaining weighted-average lease term is
11.3
years, and the weighted-average discount rate was
2.55
%
utilizing the Company’s incremental Federal Home Loan Bank (“FHLB”)
borrowing rate for borrowings of a similar term at the date of
lease commencement.
39
The following table presents components of operating lease expense
in the accompanying consolidated statements of operations
for the three-and six-month periods ended June 30, 2023 and 2022:
For the Three Months Ended June 30,
For the Six Months Ended June 30,
2023
2022
2023
2022
(Dollars in thousands)
Finance lease amortization of right-of-use asset
$
71
$
92
$
141
$
92
Finance lease interest on lease liability
68
46
137
46
Operating lease expense
731
603
1,463
1,329
Variable lease expense
488
345
881
558
Short-term lease expense
5
5
10
10
Total lease expense
$
1,363
$
1,091
$
2,632
$
2,035
Future minimum commitments due under these lease agreements as of
June 30, 2023 are as follows:
Operating Leases
Finance Lease
(Dollars in thousands)
Remainder of 2023
$
2,059
$
245
2024
3,289
490
2025
3,309
490
2026
3,350
490
2027
3,340
528
Thereafter
12,619
8,296
Total lease payments
$
27,966
$
10,539
Less imputed interest
3,421
3,027
Total
$
24,545
$
7,512
Supplemental cash flow information –
Operating cash flows paid for operating lease amounts included in the measurement
of
lease liabilities were consolidated$
1.8
 
undermillion and $
1.4
million for the Residentialsix-months ended June 30, 2023 and Multifamily Real Estate2022, respectively. Operating
cash flows
segment.paid for finance lease amounts included in the measurement of lease liabilities was $
0.2
million and $
0.1
million for the six-months
ended June 30, 2023 and 2022, respectively. During the six-months ended
June 30, 2023, the Company did
no
t record any ROU assets
that were exchanged for operating lease liabilities.
Note 5:
Goodwill and Core Deposit Intangible
Goodwill is measured as the excess of the fair value of consideration paid over the
fair value of net assets acquired. In accordance
with GAAP, the Company performs annual tests to identify impairment of goodwill
and more frequently if events or circumstances
indicate a potential impairment may exist.
No
goodwill impairment was recorded during the six-months ended June 30, 2023.
The Company is amortizing the core deposit intangible (“CDI”) from the
Farmers & Stockmens acquisition 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 $
0.8
million and $
1.6
million for the three- and six-month periods ended June 30, 2023, respectively.
40
The gross carrying amount of goodwill and the gross carrying amount and
accumulated amortization of the CDI at June 30, 2023
and December 31, 2022 were:
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(Dollars in thousands)
June 30, 2023
Goodwill
$
12,836
$
-
$
12,836
Core deposit intangible
17,479
2,858
14,621
Total goodwill and intangible assets
$
30,315
$
2,858
$
27,457
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
The following table shows the estimated future amortization expense for
the CDI as of June 30, 2023:
Amount
Years ending December 31,
(Dollars in thousands)
For the six months ending December 31, 2023
$
1,517
For the year ending December 31, 2024
2,762
For the year ending December 31, 2025
2,436
For the year ending December 31, 2026
2,109
For the year ending December 31, 2027
1,783
 
Note 6:
Derivatives and Hedging
The Company is exposed to certain risks arising from both its business operations and
economic conditions, including interest
rate, liquidity, and
credit risk. The Company uses derivative financial instruments as part of its risk management
activities to manage
exposures that arise from business activities that result in the receipt or payment
of future known and uncertain cash amounts, the value
of which are determined by interest rates.
Cash Flow Hedges of Interest Rate Risk
The Company uses interest rate derivatives to add stability to interest income
and expense and to manage its exposure to interest
rate movements. To
accomplish this objective, the Company uses interest rate swaps and collars as part of its interest
rate risk
management strategy.
Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts
from a counterparty in
exchange for the Company making fixed-rate payments over the life
of the agreements without exchange of the underlying notional
amount. Interest rate collars designated as cash flow hedges involve
payments of variable-rate amounts if interest rates rise above the
cap strike rate on the contract and the receipt of variable-rate amounts
if interest rates fall below the floor strike rate on the contract.
During 2023, such derivatives were used to hedge the variable cash flows associated
with existing variable-rate debt and loan assets.
Previously, 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. Derivatives designated and that qualify
as cash flow hedges include
five
instruments with a notional amount of $
340
million and
one
instrument with a notional amount of $
250
million at June 30, 2023 and December 31, 2022, respectively.
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 debt.
The Company currently estimates that $
1.5
million will be reclassified as a decrease to net interest income during the next twelve
months.
41
The Company is hedging its exposure to the variability in future cash flows for forecasted
transactions over a maximum period of
5.9
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.
Swap fees earned upon origination and credit valuation adjustments that represent
the risk of a counterparty’s default are reported
on the statements of operations as swap fee income, net. The effect of the Company’s derivative financial
instruments gain (loss) is
reported on the statements of cash flows within “other assets” and “other liabilities”.
These
48
and
49
swaps had an aggregate notional amount of $
378
million and $
421
million at June 30, 2023 and December 31,
2022, respectively.
Fair Values
of Derivative Instruments on the Statements of Financial Condition
The table below presents the fair value of the Company’s derivative financial
instruments and their classification on the
Statements of Financial Condition as of June 30, 2023 and December
31, 2022:
Asset Derivatives
Liability Derivatives
Statement of
Financial
Condition
June 30,
December 31,
Statement of
Financial
Condition
June 30,
December 31,
Location
2023
2022
Location
2023
2022
(Dollars in thousands)
Interest rate products:
Derivatives
designated as hedging
instruments
Other assets
and Interest
receivable
$
211
$
-
Interest payable
and other
liabilities
$
7,726
$
5,403
Derivatives not
designated as hedging
instruments
Other assets
and Interest
receivable
10,415
11,038
Interest payable
and other
liabilities
10,415
11,039
Total
$
10,626
$
11,038
$
18,141
$
16,442
42
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income
(Loss) for the
three- and six-months ended June 30, 2023 and 2022.
Location of
Gain or (Loss)
Recognized
from
Accumulated
Other
Comprehensive
Income into
Earnings
Gain or
(Loss)
Recognized
in OCI on
Derivative
Gain or
(Loss)
Recognized
in OCI
Included
Component
Gain or
(Loss)
Recognized
in OCI
Excluded
Component
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Earnings
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Earnings
Included
Component
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Earnings
Excluded
Component
(Dollars in thousands)
For the Three Months Ended June 30, 2023
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Income
$
(3,839)
$
(3,839)
$
-
$
-
$
-
$
-
Interest Rate Products
Interest Expense
207
207
-
9
9
-
Total
$
(3,632)
$
(3,632)
$
-
$
9
$
9
$
-
For the Three Months Ended June 30, 2022
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Expense
1,385
1,385
-
-
-
-
Total
$
1,385
$
1,385
$
-
$
-
$
-
$
-
Location of
Gain or (Loss)
Recognized
from
Accumulated
Other
Comprehensive
Income into
Earnings
Gain or
(Loss)
Recognized
in OCI on
Derivative
Gain or
(Loss)
Recognized
in OCI
Included
Component
Gain or
(Loss)
Recognized
in OCI
Excluded
Component
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Earnings
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Earnings
Included
Component
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Earnings
Excluded
Component
(Dollars in thousands)
For the Six Months Ended June 30, 2023
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Income
$
(2,299)
$
(2,299)
$
-
$
-
$
-
$
-
Interest Rate Products
Interest Expense
207
207
-
9
9
-
Total
$
(2,092)
$
(2,092)
$
-
$
9
$
9
$
-
For the Six Months Ended June 30, 2022
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Expense
4,040
4,040
-
-
-
-
Total
$
4,040
$
4,040
$
-
$
-
$
-
$
-
As of June 30, 2023 and December 31, 2022, the Company had minimum collateral
thresholds with certain of its derivative
counterparties and has received collateral of $
2.8
million and $
4.9
million, respectively.
43
Note 7:
Time Deposits and Borrowings
The scheduled maturities, excluding interest, of the Company’s borrowings at
June 30, 2023 were as follows:
June 30, 2023
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
$
1,709,991
$
122,995
$
1,849
$
2,208
$
1,181
$
231
$
1,838,455
FHLB borrowings
4,153
11,391
-
-
65,000
15,000
95,544
FHLB line of credit
167,164
-
-
-
-
-
167,164
Line of credit
-
7,500
-
-
-
-
7,500
SBA secured borrowing
-
-
-
-
-
5,731
5,731
Trust preferred securities
(1)
-
-
-
-
-
1,089
1,089
$
1,881,308
$
141,886
$
1,849
$
2,208
$
66,181
$
22,051
$
2,115,483
(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 8:
Income Tax
An income tax expense reconciliation at the statutory rate to the Company’s
actual income tax expense is shown below:
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
(Dollars in thousands)
Computed at the statutory rate (21%)
$
4,256
$
4,110
$
8,483
$
8,523
Increase (decrease) resulting from
Tax-exempt income
(835)
(890)
(1,715)
(1,744)
Nondeductible expenses
67
111
160
193
State income taxes
670
728
1,302
1,424
Equity based compensation
80
15
35
(154)
Other adjustments
(19)
(47)
(25)
(27)
Actual tax expense
$
4,219
$
4,027
$
8,240
$
8,215
The tax effects of temporary differences related to deferred taxes located
in “other assets” on the consolidated statements of
financial condition are presented below:
June 30, 2023
December 31, 2022
(Dollars in thousands)
Deferred tax assets
Net unrealized loss on securities available-for-sale
$
19,634
$
20,295
Allowance for credit losses
17,857
16,710
Lease incentive
424
451
Loan fees
4,078
4,048
Accrued expenses
2,171
3,379
Deferred compensation
2,023
2,166
Other
1,419
1,469
Total deferred tax asset
47,606
48,518
Deferred tax liability
FHLB stock basis
(287)
(436)
Premises and equipment
(1,819)
(2,042)
Other
(1,062)
(1,018)
Total deferred tax liability
(3,168)
(3,496)
Net deferred tax asset
$
44,438
$
45,022
44
Note 9:
Change in Accumulated Other Comprehensive Income (Loss)
Amounts reclassified from AOCI and the affected line items in the consolidated statements of operations during the
three-
and
six-month periods ended June 30, 2023 and 2022, were as follows:
Three Months Ended
Six Months Ended
June 30,
June 30,
Affected Line Item in the
2023
2022
2023
2022
Statements of Operations
(Dollars in thousands)
Realized (losses) gains on available-for-sale
securities
$
-
$
(12)
$
63
$
(38)
Realized gains (losses) on sale
of available-for-sale securities
Less: tax (benefit) expense effect
-
(3)
15
(9)
Income tax expense
Realized (losses) gains on available-for-sale
securities, net of income tax
-
(9)
48
(29)
Interest income on cash flow hedges
9
-
9
-
Interest expense - Deposits
Less: tax expense effect
2
-
2
-
Income tax expense
Interest income on cash flow hedges, net of
tax
7
-
7
-
Total reclassified amount
$
7
(9)
55
(29)
Note 10:
Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s consolidated
financial statements. Management believes that,
as of June 30, 2023, the Company and the Bank met all capital adequacy requirements
to which they are subject.
The capital rules require the Company to maintain a
2.5
% capital conservation buffer with respect to Common Equity Tier I
capital, Tier I capital to risk-weighted assets, and total capital to risk-weighted assets, which
is included in the column “Required to be
Considered Adequately Capitalized” within the table below. A financial institution with a conservation buffer of less than the required
amount is subject to limitations on capital distributions, including dividend
payments and stock repurchases, as well as certain
discretionary bonus payments to executive officers.
The Company and the Bank opted to exclude AOCI from the regulatory capital calculations. As a result, changes in AOCI, net of
tax, do not impact the Company’s or Bank’s regulatory capital ratios.
45
The Company’s and the Bank’s actual capital amounts and ratios as of June 30,
2023 and December 31, 2022 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)
June 30, 2023
Total Capital to Risk-Weighted Assets
Consolidated
$
763,079
10.7
%
N/A
N/A
$
751,833
10.5
%
Bank
765,483
10.7
$
715,561
10.0
%
751,339
10.5
Tier I Capital to Risk-Weighted Assets
Consolidated
687,799
9.6
N/A
N/A
608,626
8.5
Bank
690,203
9.6
572,449
8.0
608,227
8.5
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
678,960
9.5
N/A
N/A
501,222
7.0
Bank
690,203
9.6
465,115
6.5
500,893
7.0
Tier I Capital to Average Assets
Consolidated
687,799
9.9
N/A
N/A
279,015
4.0
Bank
$
690,203
9.9
%
$
348,828
5.0
%
$
279,063
4.0
%
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 I 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 I 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
%
(1)
Represents the minimum capital required for capital adequacy under Basel III.
Includes capital conservation buffer of
2.5
%.
Note 11:
Stock-Based Compensation
The Company issues stock-based compensation in the form of non-vested
restricted stock, restricted stock units and stock
appreciation rights under the 2018 Omnibus Equity Incentive Plan (as amended,
the “Omnibus Plan”). The Omnibus Plan will expire on
the tenth anniversary of its effective date. In addition, the Company
has an Employee Stock Purchase Plan that was reinstated during the
third quarter of 2020. The aggregate number of shares authorized for future issuance under the
Omnibus Plan is
1,275,410
shares as of
June 30, 2023.
46
The table below summarizes the stock-based compensation for the
three- and six-months-ended June 30, 2023 and 2022:
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
(Dollars in thousands)
Stock appreciation rights
$
42
$
88
$
141
$
187
Performance-based stock awards
298
200
534
411
Restricted stock units and awards
889
795
1,768
1,573
Employee stock purchase plan
36
37
60
64
Total stock-based compensation
$
1,265
$
1,120
$
2,503
$
2,235
Performance-Based Restricted Stock Units
The Company awards performance-based restricted stock units (“PBRSUs”) to
key officers of the Company. The PBRSUs
typically cliff-vest at the end of
three years
based on attainment of certain performance metrics developed by the Compensation
Committee. The ultimate number of shares issuable under each performance award
is the product of the award target and the award
payout percentage given the level of achievement. The award payout percentages by level of
achievement range between
0
% of target
and
150
% of target.
During the six-month period ended June 30, 2023, the Company granted
128,005
PBRSUs. The performance metrics include
three-year
cumulative earnings per share and relative total shareholder return.
The following table summarizes the status of and changes in the PBRSUs:
Performance-Based Restricted
Stock Unit Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2023
134,286
$
14.52
Granted
128,005
14.13
Vested
(20,736)
13.55
Forfeited
(5,335)
14.49
Unvested, June 30, 2023
236,220
$
14.40
Unrecognized stock-based compensation related to the performance
awards issued through June 30, 2023 was $
2.4
million and is
expected to be recognized over
2.3
years.
Restricted Stock Units and Restricted Stock Awards
The Company issues time-based restricted stock units (“RSUs”) and restricted
stock awards (“RSAs”) to provide incentives to
key officers, employees, and non-employee directors. Awards are typically granted annually as determined by
the Compensation
Committee. The service-based RSUs typically vest in equal amounts over three years. The service-based
RSAs typically cliff-vest after
one year
.
The following table summarizes the status of and changes in the RSUs and RSAs:
Restricted Stock Units and Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2023
416,980
$
14.13
Granted
333,979
13.20
Vested
(209,641)
13.74
Forfeited
(18,751)
14.31
Unvested, June 30, 2023
522,567
$
13.68
47
Unrecognized stock-based compensation related to the RSUs and RSAs issued through
June 30, 2023 was $
6.0
million and is
expected to be recognized over
2.1
years.
Note 12:
Stock Warrants
The Company had
80,000
outstanding, fully vested warrants to purchase common stock at a strike price
of $
5.00
per share as of
December 31, 2022. During the six-month period ended June 30, 2023, the
remaining, fully vested
80,000
warrants were exercised and
cash settled resulting in a reduction to additional paid in capital of $
0.4
million. There were
no
outstanding warrants as of June 30, 2023.
Note 13: Stockholders’ Equity
The following table presents the computation of basic and diluted earnings per
common share:
Three Months Ended
Six Months Ended
June 30,
June 30,
2023
2022
2023
2022
(Dollars in thousands except per share data)
Earnings per Common Share
Net Income
$
16,047
$
15,545
$
32,155
$
32,373
Less: preferred stock dividends
103
-
103
-
Net income available to common stockholders
$
15,944
$
15,545
$
32,052
$
32,373
Weighted average common shares
48,744,507
49,758,263
48,690,509
50,003,418
Earnings per common share
$
0.33
$
0.31
$
0.66
$
0.65
Diluted Earnings per Common Share
Net Income
$
16,047
$
15,545
$
32,155
$
32,373
Less: preferred stock dividends
103
-
103
-
Net income available to common stockholders
$
15,944
$
15,545
$
32,052
$
32,373
Weighted average common shares
48,744,507
49,758,263
48,690,509
50,003,418
Effect of dilutive shares
198,818
445,462
304,298
558,450
Weighted average dilutive common shares
48,943,325
50,203,725
48,994,807
50,561,868
Diluted earnings per common share
$
0.33
$
0.31
$
0.65
$
0.64
Stock-based awards not included because to do so would be
antidilutive
920,812
711,375
917,479
450,541
Dividends of $
103
thousand related to the Series A Non-Cumulative Perpetual Preferred Stock were declared and paid during the
three-months ended June 30, 2023.
In July 2023, the Board of Directors declared a quarterly dividend on Series A Non-Cumulative
Perpetual Preferred Stock in the amount of $
20.00
per share to be payable on
September 15, 2023
to shareholders of record as of
August 31, 2023
.
Note 14:
Disclosures about Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between
market participants at the measurement date. Fair value measurements must maximize
the use of observable inputs and minimize the use
of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure
fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted
prices in
markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for
substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs supported by little or no market activity and significant to
the fair value of the assets or liabilities.
48
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 June 30, 2023 and December 31, 2022:
Fair Value Description
Valuation
Hierarchy
Level
Where Fair
Value Balance
Can Be Found
Available-for-
Sale Securities
Where quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. If quoted market prices
are not available, then fair values are estimated by using quoted prices of
securities with similar characteristics or independent asset pricing services
and pricing models, the inputs of which are market-based or independently
sourced market parameters, including, but not limited to, yield curves,
interest rates, volatilities, prepayments, defaults, cumulative loss projections
and cash flows.
Level 2
Note 2:
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 6:
Derivatives and
Hedging
Non-recurring Measurements
The following tables present assets measured at fair value on a non-recurring
basis and the level within the fair value hierarchy in
which the fair value measurements fall at June 30, 2023 and December
31, 2022:
June 30, 2023
Fair Value Measurements Using
Fair Value
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Collateral-dependent loans
$
8,452
$
-
$
-
$
8,452
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
Following is a description of the valuation methodologies and inputs used for
assets measured at fair value on a non-recurring
basis and recognized in the accompanying consolidated statements of
financial condition.
Collateral-Dependent Loans,
Net of ACL
The estimated fair value of collateral-dependent loans is based on the appraised
fair value of the collateral, less estimated cost to
sell. If the fair value of the collateral is below the loan’s amortized cost, the ACL is netted against the loan balance. Collateral-dependent
loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining
fair value and then considers other
factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral dependent
loans are
49
obtained when the loan is determined to be collateral dependent and subsequently
as deemed necessary by the Office of the Chief Credit
Officer.
Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved
appraisers maintained by management. The appraised values are reduced by discounts to
consider lack of marketability and estimated
cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts
and estimates are developed
by the Office of the Chief Credit Officer by comparison to historical results.
Foreclosed Assets Held-for-Sale
The fair value of foreclosed assets-held-for-sale is based on the appraised fair value of
the collateral, less estimated cost to sell.
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable
inputs used in non-recurring Level 3 fair value
measurements at June 30, 2023 and December 31, 2022:
June 30, 2023
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
0
%
-
25
%
Collateral dependent loans
8,452
(
16
)%
December 31, 2022
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
0
%
-
100
%
Collateral dependent loans
8,728
(
13
)%
$
Market comparable
properties
Marketability
discount
10%
Foreclosed assets held-for-sale
1,745
(
10
)%
50
The following tables present the estimated fair values of the Company’s financial
instruments at June 30, 2023 and December 31,
2022:
June 30, 2023
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
342,497
$
342,497
$
-
$
-
Available-for-sale securities
743,900
-
743,900
-
Loans, net of allowance for credit losses
5,729,032
-
-
5,718,780
Restricted equity securities
13,060
-
-
13,060
Interest receivable
33,303
-
33,303
-
Equity securities
3,993
-
-
3,993
Derivative assets
10,626
-
10,626
-
Financial Liabilities
Deposits
$
6,100,067
$
928,098
$
-
$
5,142,980
Federal Home Loan Bank line of credit
167,164
-
167,164
-
Federal Home Loan Bank advances
95,544
-
88,189
-
Other borrowings
14,320
-
15,021
-
Interest payable
14,479
-
14,479
-
Derivative liabilities
18,141
-
18,141
-
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 allowance for loan losses
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
-
51
Note 15:
Commitments and Credit Risk
Commitments
The Company had the following commitments at June 30, 2023 and December
31, 2022:
June 30, 2023
December 31, 2022
(Dollars in thousands)
Commitments to originate loans
$
118,369
$
134,961
Standby letters of credit
66,851
66,889
Lines of credit
2,518,588
2,705,730
Future lease commitments
5,833
1,888
Commitments related to investment fund
2,548
3,403
$
2,712,189
$
2,912,871
Note 16:
Subsequent Events
On August 1, 2023, the Company completed its acquisition of Canyon Bancorporation, Inc. and its wholly owned
subsidiary,
Canyon Community Bank, N.A. (collectively, “Canyon”) whereby
Canyon Bancorporation, Inc. was ultimately merged with and into
CrossFirst Bankshares, Inc. and Canyon Community Bank, N.A. was merged
with and into CrossFirst Bank. Pursuant to the merger
agreement executed in April 2023, the Company paid approximately $
9.1
million of cash consideration and issued
597,645
shares of
Company common stock, and the Company and the Bank assumed all of
the assets and liabilities of the Canyon entities with which they
merged by operation of law. The acquisition added one full-service branch in Tucson, Arizona to the Company’s footprint.
52
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF
OPERATIONS
The following management's discussion and analysis of our financial condition
and results of operations should be read in
conjunction with our consolidated financial statements and related notes
as of and for the three- and six-months ended June 30, 2023,
and with our 2022 Form 10-K, which includes our audited consolidated financial
statements and related notes as of December 31, 2022
and 2021 and for the years ended December 31, 2022, 2021
and 2020. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions that may cause actual results to differ
materially from management's expectations.
Factors that could cause such differences are discussed in the section entitled
“Cautionary Note Regarding Forward-Looking
Statements” located elsewhere in this quarterly report and in Item 1A “Risk Factors” in our 2022 Form 10-K and should
be read
herewith.
Second Quarter 2023 Highlights
During the second quarter ended June 30, 2023, we accomplished the following:
●
Received regulatory approval for the acquisition of Canyon Bancorporation,
Inc. and its wholly owned subsidiary, Canyon
Community Bank, N.A. (collectively, “Canyon”),
which is expected to add low-cost liquidity and deepen our Arizona
franchise; the transaction closed on August 1, 2023
●
Loans grew $149 million, or 2.6%, for the quarter and grew 7.9% year-to
date; loan growth was well diversified across
commercial and industrial, energy and commercial real estate – owner-occupied
●
Credit metrics remained strong with annualized net charge-offs of just 0.04% of
average total loans and a non-performing
assets to total assets ratio of 0.19%
●
Non-interest-bearing deposits stabilized, decreasing 4% from the prior quarter,
while total deposits increased 4.5% due to an
increase in wholesale funding sources at quarter-end
●
Identified meaningful non-interest expense savings for the remainder
of 2023, advancing our efficiency improvement goal
●
Book value per common share grew to $13.39 while tangible book value per common
share
(1)
grew to $12.67
(1)
Represents a non-GAAP financial measure.
See “Non-GAAP Financial Measures” below for a reconciliation of these measures.
Mergers and Acquisitions
Update
On August 1, 2023, the Company completed its acquisition of Canyon whereby Canyon Bancorporation, Inc.
was ultimately
merged with and into CrossFirst Bankshares, Inc. and Canyon Community
Bank, N.A. was merged with and into CrossFirst Bank. In
accordance with the agreement, the Company paid approximately $9.1
million of cash consideration and issued 597,645 shares of
Company common stock, and the Company and the Bank assumed
all of the assets and liabilities of the Canyon entities with which they
merged by operation of law.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
32
Collateral Dependent Loans:
Collateral dependent loans are loans for which the repayment is expected to be provided
 
substantially through the operation or
sale of the collateral and the borrower is experiencing financial difficulty. The following
table presents the amortized cost balance of53
loans considered collateral dependent by loan segment and collateral type
Performance Measures
as of September 30, 2022:
As of or For the Three Months
Ended
As of or For the Six Months
Ended
June 30,
March 31,
December 31,
September 30,
June 30,
June 30,
June 30,
2023
2023
2022
Loan Segment and Collateral Description2022
Amortized Cost of2022
Collateral Dependent2023
Loans
Related Allowance for
Credit Losses
Amortized Cost of
Collateral Dependent
Loans with no related
Allowance2022
(Dollars in thousands)thousands, except per share data)
Commercial and IndustrialReturn on average assets
All business(1)
0.93
%
0.97
%
0.77
%
1.19
%
1.12
%
0.95
%
1.18
%
Adjusted return on average assets
(1)(2)
1.00
%
1.04
%
1.15
%
1.19
%
1.20
%
1.02
%
1.21
%
Return on average common equity
(1)
10.00
%
10.54
%
8.04
%
11.18
%
10.15
%
10.26
%
10.30
%
Adjusted return on average common
equity
(1)(2)
10.81
%
11.30
%
12.03
%
11.22
%
10.82
%
11.05
%
10.62
%
Earnings per common share - basic
$
2,6680.33
$
-0.33
$
2,668
Commercial and Industrial Lines of Credit
All business assets
5,519
-
5,519
Energy
Oil and natural gas properties
9,626
157
9,469
Commercial Real Estate
Commercial real estate properties
2,489
-
2,4890.25
$
20,3020.35
$
1570.31
$
20,1450.66
$
0.65
Earnings per common share - diluted
$
0.33
$
0.33
$
0.24
$
0.35
$
0.31
$
0.65
$
0.64
Adjusted earnings per common share -
diluted
(1)
$
0.35
$
0.35
$
0.36
$
0.35
$
0.33
$
0.70
$
0.66
Efficiency ratio
(2)
62.02
%
60.81
%
62.40
%
53.20
%
57.36
%
61.41
%
57.46
%
Adjusted efficiency ratio - FTE
(2)(3)(4)
57.27
%
56.42
%
55.01
%
52.25
%
53.95
%
56.84
%
55.26
%
Ratio of equity to assets
9.15
%
9.36
%
9.22
%
9.93
%
10.65
%
9.15
%
10.65
%
(1)
Interim periods annualized
(2)
Represents a non-GAAP financial measure.
See "Non-GAAP Financial Measures"
below for a reconciliation of these measures.
(3)
We calculate efficiency ratio as non-interest expense
divided by the sum of net interest income and
non-interest income.
(4)
Tax exempt income (tax-free municipal securities)
is calculated on a tax equivalent basis.
The incremental tax rate used is 21.0%.
Results of Operations
Net Interest Income
Net interest income is presented on a fully tax equivalent basis.
We believe reporting on an FTE basis provides for improved
comparability between the various earning assets. Changes in interest
income and interest expense result from changes in average
balances (volume) of interest earning assets and interest-bearing liabilities,
as well as changes in average interest rates.
The following tables present, for the periods indicated, average statement
of financial condition information, interest income,
interest expense and the corresponding average yield and rates paid:
Troubled Debt Restructurings
TDRs are those extended to borrowers who are experiencing financial
 
difficulty and who have been granted a concession,
excluding loan modifications as a result of the COVID-19 pandemic.
 
The modification of terms typically includes the extension of
maturity, reduction or deferment of monthly payment, or reduction of the
 
stated interest rate.
 
For the nine-month periods ended September 30, 2022 and 2021,
no
 
loans were restructured under the TDR guidance. The
outstanding balance of TDRs was $
34
 
million and $
40
 
million as of September 30, 2022 and December 31, 2021, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
33
Disclosures under Previously Applicable
 
GAAP
The following disclosures are presented under previously applicable GAAP. The description
of the general characteristics of the54
loan rating categories is as described above. The following table presents
the credit risk profile of the Company’s loan portfolio based onThree Months Ended
an internal rating category and portfolio segment as of December 31, 2021:
June 30,
As of December 31, 20212023
Pass2022
SpecialAverage
MentionBalance
SubstandardInterest
PerformingIncome /
SubstandardExpense
Non-Average
performingYield /
DoubtfulRate
Loss(4)
TotalAverage
Balance
Interest
Income /
Expense
Average
Yield /
Rate
(4)
(Dollars in thousands)
Commercial andInterest-earning assets:
industrialSecurities - taxable
$
1,356,883336,446
$
16,2012,986
3.55
%
$
23,739220,763
$
4,8581,299
2.35
%
Securities - tax-exempt
(1)
511,993
4,321
3.38
553,960
4,653
3.36
Interest-bearing deposits in other banks
145,559
1,609
4.43
198,210
369
0.75
Gross loans, net of unearned income
(2)(3)
5,776,137
98,982
6.87
4,437,917
47,327
4.28
Total interest-earning assets - FTE
(1)
6,770,135
$
-107,898
6.39
%
5,410,850
$
-53,648
3.98
%
Allowance for credit losses
(66,078)
(56,732)
Other non-interest-earning assets
225,915
191,539
Total assets
$
1,401,6816,929,972
Energy$
184,2695,545,657
73,196Interest-bearing liabilities
5,246Transaction deposits
13,595$
2,554598,646
-$
278,8604,339
Commercial real2.91
estate%
1,172,323$
86,768508,403
11,782$
10,222374
0.29
%
Savings and money market deposits
2,707,637
26,927
3.99
2,334,103
2,869
0.49
Time deposits
1,612,105
17,397
4.33
559,708
1,489
1.07
Total interest-bearing deposits
4,918,388
48,663
3.97
3,402,214
4,732
0.56
FHLB and short-term borrowings
349,763
3,888
4.46
330,064
1,368
1.66
Trust preferred securities, net of fair value
adjustments
1,077
58
21.60
1,024
29
11.94
Non-interest-bearing deposits
921,259
-
-
1,281,095
Construction and
land development
578,7581,149,654
-
-
-Cost of funds
-
-
578,758
Residential and
multifamily real
estate
593,847
257
6,508
204
-
-
600,816
PPP
64,805
-
-
-
-
-
64,805
Consumer
63,605
-
-
-
-
-
63,6056,190,487
$
4,014,49052,609
3.41
%
4,882,956
$
176,4226,129
0.50
%
Other liabilities
91,994
48,160
Stockholders’ equity
647,491
614,541
Total liabilities and stockholders’ equity
$
47,2756,929,972
$
28,8795,545,657
Net interest income - FTE
(1)
$
2,55455,289
$
-47,519
$Net interest spread - FTE
4,269,620
(1)
2.98
%
3.48
%
Net interest margin - FTE
(1)
3.27
%
3.52
%
(1)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The following table presents the Company’s loan portfolio aging analysisincremental tax
rate used is 21.0%.
(2)
Loans, net of the
recorded investment inunearned income include non-accrual loans of $13 million and $28 million as of December 31,June 30, 2023 and 2022, respectively.
2021:
(3)
AsLoan interest income includes loan fees of December 31, 2021$3 million for the three-months ended June 30, 2023 and 2022.
30-59 Days(4)
Past DueActual unrounded values are used to calculate the reported yield or rate. Accordingly, recalculations using the amounts in thousands as disclosed in this
60-89 Days
Past Due
90 Days or
More
Total Past
Due
Current
Total Loans
Receivable
Loans >= 90
Days and
Accruing
(Dollars in thousands)
Commercial and industrial
$
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
-
$
1,671
$
1,858
$
5,681
$
9,210
$
4,260,410
$
4,269,620
$
90
report may not produce the same amounts.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
34
The following table presents the Company’s loans on non-accrual as of
December 31, 2021:
December 31, 2021
(Dollars in thousands)
Commercial and industrial
$
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
The following table presents the allowance for loan losses by portfolio segment
and disaggregated based on the Company’s
impairment methodology:
As of December 31, 2021
Commercial
and
Industrial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Period end allowance for loan losses allocated to:
Individually
evaluated for
impairment
$
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
Notes to Condensed Consolidated Financial Statements
(unaudited)
35
A loan is considered impaired when based on current information and events, it is probable the Company will be unable to
collect
all amounts due from the borrower in accordance with the contractual terms
of the loan. Impaired loans include non-performing loans
but also include loans modified in TDRs where concessions have been granted to borrowers experiencing
financial difficulties. The
intent of concessions is to maximize collection. The following table presents loans
individually evaluated for impairment:
As of December 31, 2021
Recorded Balance
Unpaid Principal Balance
Specific Allowance
(Dollars in thousands)
Loans without a specific valuation
Commercial and industrial
$
4,659
$
4,740
$
-
Energy
3,509
7,322
-
Commercial real estate
1,729
1,729
-
Construction and land development
-
-
-
Residential and multifamily real estate
3,387
3,387
-
PPP
-
-
-
Consumer
-
-
-
Loans with a specific valuation
Commercial and industrial
1,080
1,080
333
Energy
12,695
17,977
2,100
Commercial real estate
29,868
30,854
3,164
Construction and land development
-
-
-
Residential and multifamily real estate
-
-
-
PPP
-
-
-
Consumer
-
-
-
Total
Commercial and industrial
5,739
5,820
333
Energy
16,204
25,299
2,100
Commercial real estate
31,597
32,583
3,164
Construction and land development
-
-
-
Residential and multifamily real estate
3,387
3,387
-
PPP
-
-
-
Consumer
-
-
-
$
56,927
$
67,089
$
5,597
Total interest income recognized during the three and nine-month periods
ended September 30, 2021 for impaired loans was $
0.6
million and $
1.9
million, respectively. The three- and nine-month average balance of impaired loans for the period
ended September 30,
2021 was $
95
million and $
97
million, respectively.
Notes to Condensed Consolidated Financial Statements
(unaudited)
36
The following table presents the activity in the allowance for loan losses by portfolio
segment for the three-
and nine-month
periods ended September 30, 2021:
Three Months Ended September 30, 2021
Commercial
and
Industrial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Allowance for loan losses:
Beginning
balance
$
28,433
$
17,849
$
19,181
$
3,885
$
5,826
$
-
$
319
$
75,493
Provision
(3,666)
(4,798)
(236)
(694)
(561)
-
(45)
(10,000)
Charge-offs
(1,071)
(503)
-
-
-
-
(1)
(1,575)
Recoveries
225
-
-
-
5
-
4
234
Ending balance
$
23,921
$
12,548
$
18,945
$
3,191
$
5,270
$
-
$
277
$
64,152
Nine Months Ended September 30, 2021
Commercial
and
Industrial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Allowance for loan losses:
Beginning
balance
$
24,693
$
18,341
$
22,354
$
3,612
$
5,842
$
-
$
453
$
75,295
Provision
10,881
(5,290)
(3,409)
(421)
(577)
-
(184)
1,000
Charge-offs
(11,903)
(503)
-
-
-
-
(1)
(12,407)
Recoveries
250
-
-
-
5
-
9
264
Ending balance
$
23,921
$
12,548
$
18,945
$
3,191
$
5,270
$
-
$
277
$
64,152
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses for off-balance sheet credit
exposures unless the obligation is unconditionally
cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The
estimate is calculated for each loan segment and includes consideration of the
likelihood that funding will occur and an estimate of the
expected credit losses on commitments expected to be funded over its estimated life.
For each pool of contractual obligations expected
to be funded, the Company uses the reserve rate established for the related
loan pools.
The $7 million allowance for credit losses on off
balance sheet credit exposures at September 30, 2022 is included in “interest payable
and other liabilities” on the balance sheet.
The following categories of off-balance sheet credit exposures have been
identified:
Loan commitments – include revolving lines of credit, non-revolving lines
of credit, and loans approved that are not yet funded.
Risks inherent to revolving lines of credit often are related to the susceptibility of
an individual or business experiencing
unpredictable cash flow or financial troubles, thus leading to payment default.
The primary risk associated with non-revolving
lines of credit is the diversion of funds for other expenditures.
Letters of credit – are primarily established to provide assurance to the beneficiary
that the applicant will perform certain
obligations arising out of a separate transaction between the beneficiary and
applicant. If the obligation is not met, it gives the
beneficiary the right to draw on the letter of credit.
Notes to Condensed Consolidated Financial Statements
(unaudited)
37
Note 5:
Derivatives and Hedging
The Company is exposed to certain risks arising from both its business operations and
economic conditions, including interest
rate, liquidity, and
credit risk. The Company uses derivative financial instruments as part of its risk management
activities to manage
exposures that arise from business activities that result in the receipt or payment
of future known and uncertain cash amounts, the value
of which are determined by interest rates.
Cash Flow Hedges of Interest Rate Risk
The Company uses interest rate derivatives to add stability to interest income
and expense and to manage its exposure to interest
rate movements. To
accomplish this objective, the Company uses interest rate swaps and collars as part of its interest
rate risk
management strategy.
Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts
from a counterparty in
exchange for the Company making fixed-rate payments over the life
of the agreements without exchange of the underlying notional
amount. Interest rate collars designated as cash flow hedges involve
payments of variable-rate amounts if interest rates rise above the
cap strike rate on the contract and the receipt of variable-rate amounts
if interest rates fall below the floor strike rate on the contract.
During 2022, such derivatives were used to hedge the variable cash flows
associated with existing variable-rate loan assets.
The five
swaps that were entered into in 2021 were terminated during the third quarter
of 2022, however, the amortization of the gains
on these
instruments will start in 2023 based on the original effective dates
of these swaps.
The Company also entered into a new interest rate
collar during the third quarter of 2022. Derivatives designated and
that qualify as cash flow hedges include
one
instrument with a
notional amount of $
250
million at September 30, 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 Condensed Consolidated
Statements of Income for the three-
and
nine-month periods ended September 30, 2022. The Company estimates that less than $
0.1
million will be reclassified as a decrease to
interest expense during the next twelve months.
The Company is hedging its exposure to the variability in future cash flows for forecasted
transactions over a maximum period of
6.6
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.
Swap fees earned upon origination and credit valuation adjustments that represent
the risk of a counterparty’s default are reported
on the Consolidated Statements of Income as swap fee income, net. The effect of the
Company’s derivative financial instruments gain
(loss) is reported on the Consolidated Statements of Cash Flows within “other
assets” and “other liabilities”.
These
48
and
54
swaps had an aggregate notional amount of $
409
million and $
535
million at September 30, 2022 and December
31, 2021, respectively.
Notes to Condensed Consolidated Financial Statements
(unaudited)
38
Fair Values
of Derivative Instruments on the Consolidated Balance Sheets
The table below presents the fair value of the Company’s derivative financial
instruments and their classification on the
Consolidated Balance Sheets as of September 30, 2022 and December
31, 2021:
Asset Derivatives
Liability Derivatives
Balance Sheet
September 30,
December 31,
Balance Sheet
September 30,
December 31,
Location
2022
2021
Location
2022
2021
(Dollars in thousands)
Interest rate products:
Derivatives not
designated as hedging
instruments
Interest
receivable and
Other assets
$
11,430
$
11,305
Interest payable
and other
liabilities
$
11,431
$
11,322
Derivatives
designated as hedging
instruments
Other assets
-
3
Interest payable
and other
liabilities
6,891
565
Total
$
11,430
$
11,308
$
18,322
$
11,887
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive Income
(Loss) for the
three-
and nine-months ended September 30, 2022. The Company had no cash flow hedges for
the nine-months ended September 30,
2021.
For the Three Months Ended
For the Nine Months Ended
September 30, 2022
September 30, 2022
Location of
Gain or (Loss)
Recognized
from
Accumulated
Other
Comprehensive
Income into
Income
Gain or
(Loss)
Recognized
in OCI on
Derivative
Gain or
(Loss)
Recognized
in OCI
Included
Component
Gain or
(Loss)
Recognized
in OCI
Excluded
Component
Gain or
(Loss)
Recognized
in OCI on
Derivative
Gain or
(Loss)
Recognized
in OCI
Included
Component
Gain or
(Loss)
Recognized
in OCI
Excluded
Component
(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Income
$
(6,891)
$
(6,891)
$
-
$
(6,891)
$
(6,891)
$
-
Interest Rate Products
Interest expense
(185)
(185)
-
3,855
$
3,855
-
$
(7,076)
$
(7,076)
$
-
$
(3,036)
$
(3,036)
$
-
Notes to Condensed Consolidated Financial Statements
(unaudited)
39
Note 6:
Time Deposits and Borrowings
The scheduled maturities, excluding interest, of the Company’s borrowings at
September 30, 2022 were as follows:
September 30, 2022
Within One
Year
One to Two
Years
Two to
Three Years
Three to
Four Years
Four to Five
Years
After Five
Years
Total
(Dollars in thousands)
Time deposits
$
487,378
$
244,594
$
673
$
1,722
$
15,804
$
-
$
750,171
FHLB borrowings
35,000
-
-
5,100
-
97,500
137,600
FHLB line of credit
67,749
-
-
-
-
-
67,749
Trust preferred securities
(1)
-
-
-
-
-
1,048
1,048
$
590,127
$
244,594
$
673
$
6,822
$
15,804
$
98,548
$
956,568
(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 7:
Change in Accumulated Other Comprehensive (Loss) Income
Amounts reclassified from AOCI and the affected line items in the Condensed Consolidated Statements of Income
during the
three-
and nine-month periods ended September 30, 2022 and 2021, were as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Affected Line Item in the
2022
2021
2022
2021
Statements of Income
(Dollars in thousands)
Unrealized gains (losses) on available-for-sale
securities
$
(4)
$
1,046
$
(43)
$
1,043
Gain (loss) on sale of available-
for-sale securities
Less: tax benefit effect
(1)
256
(11)
255
Income tax expense (benefit)
Net reclassified amount
$
(3)
$
790
$
(32)
$
788
Note 8:
Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Company’s consolidated
financial statements. Management believes that,
as of September 30, 2022, the Company and the Bank met all capital adequacy
requirements to which they are subject.
The capital rules require the Company to maintain a
2.5
% capital conservation buffer with respect to Common Equity Tier I
capital, Tier I capital to risk-weighted assets, and total capital to risk-weighted assets, which
is included in the column “Minimum
Capital Required - Basel III” within the table below. A financial institution with a conservation buffer of less than the required amount is
subject to limitations on capital distributions, including dividend payments and
stock repurchases, as well as certain discretionary bonus
payments to executive officers.
The Company and the Bank opted to exclude AOCI from the regulatory capital calculations. As a result, change in AOCI,
including the recent decrease in the available-for-sale securities portfolio, net
of tax, did not impact the Company’s or Bank’s regulatory
capital ratios.
Notes to Condensed Consolidated Financial Statements
(unaudited)
40
The Company’s and the Bank’s actual capital amounts and ratios as of September
30, 2022 and December 31, 2021 are presented
in the following table:
Actual
Minimum Capital
Required - Basel III
Required to be Considered
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
September 30, 2022
Total Capital to Risk-Weighted Assets
Consolidated
$
728,639
12.1
%
$
632,742
10.5
%
N/A
N/A
Bank
712,631
11.8
632,414
10.5
$
602,299
10.0
%
Tier I Capital to Risk-Weighted Assets
Consolidated
666,044
11.1
512,220
8.5
N/A
N/A
Bank
650,036
10.8
511,954
8.5
481,839
8.0
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
664,997
11.0
421,828
7.0
N/A
N/A
Bank
650,036
10.8
421,609
7.0
391,495
6.5
Tier I Capital to Average Assets
Consolidated
666,044
11.4
233,086
4.0
N/A
N/A
Bank
$
650,036
11.2
%
$
233,019
4.0
%
$
291,274
5.0
%
December 31, 2021
Total Capital to Risk-Weighted Assets
Consolidated
$
704,544
13.6
%
$
544,060
10.5
%
N/A
N/A
Bank
681,980
13.2
543,708
10.5
$
517,817
10.0
%
Tier I Capital to Risk-Weighted Assets
Consolidated
646,169
12.5
440,430
8.5
N/A
N/A
Bank
623,605
12.0
440,144
8.5
414,253
8.0
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
645,160
12.5
362,707
7.0
N/A
N/A
Bank
623,605
12.0
362,472
7.0
336,581
6.5
Tier I Capital to Average Assets
Consolidated
646,169
11.8
218,510
4.0
N/A
N/A
Bank
$
623,605
11.4
%
$
218,366
4.0
%
$
272,958
5.0
%
Note 9:
Stock-Based Compensation
The Company issues stock-based compensation in the form of non-vested
restricted stock, restricted stock units and stock
appreciation rights under the 2018 Omnibus Equity Incentive Plan (as amended,
the “Omnibus Plan”). The Omnibus Plan will expire on
the tenth anniversary of its effective date. In addition, the Company
has an Employee Stock Purchase Plan that was reinstated during the
third quarter of 2020. The aggregate number of shares authorized for future issuance under the
Omnibus Plan is
1,441,879
shares as of
September 30, 2022.
Notes to Condensed Consolidated Financial Statements
(unaudited)
41
The table below summarizes the stock-based compensation for the
three- and nine-month periods ended September 30, 2022 and
2021:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
Stock appreciation rights
$
75
$
150
$
262
$
584
Performance-based stock awards
200
75
611
337
Restricted stock units and awards
763
895
2,336
2,394
Employee stock purchase plan
31
29
95
58
Total stock-based compensation
$
1,069
$
1,149
$
3,304
$
3,373
Performance-Based Restricted Stock Units
The Company awards performance-based restricted stock units (“PBRSUs”) to
key officers of the Company. The performance-
based shares typically cliff-vest at the end of
three years
based on attainment of certain performance metrics developed by the
Compensation Committee. The ultimate number of shares issuable under each performance
award is the product of the award target and
the award payout percentage given the level of achievement. The award payout percentages
by level of achievement range between
0
%
of target and
150
% of target.
During the nine-month period ended September 30, 2022, the Company
granted
66,667
PBRSUs. The performance metrics
include
three year
cumulative, adjusted earnings per share and relative total shareholder return.
The following table summarizes the status of and changes in the performance
-based awards:
Performance-Based Restricted
Stock Unit Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2022
98,352
$
13.59
Granted
66,667
16.04
Vested
-
-
Forfeited
(24,944)
15.03
Unvested, September 30, 2022
140,075
$
14.51
Unrecognized stock-based compensation related to the performance
awards issued through September 30, 2022 was $
1
million
and is expected to be recognized over
2.1
years.
Restricted Stock Units and Restricted Stock
Awards
The Company issues time-based restricted stock units (“RSUs”) and restricted
stock awards (“RSAs”) to provide incentives to
key officers, employees, and non-employee directors. Awards are typically granted annually as determined by
the Compensation
Committee. The service-based RSUs typically vest in equal amounts over three years. The service-based
RSAs typically cliff-vest after
one year
.
Notes to Condensed Consolidated Financial Statements
(unaudited)
42
The following table summarizes the status of and changes in the RSUs and RSAs:
Restricted Stock Units and Awards
Number of Shares
Weighted-Average
Grant Date Fair Value
Unvested, January 1, 2022
383,630
$
13.52
Granted
259,627
14.97
Vested
(197,536)
13.83
Forfeited
(35,612)
14.22
Unvested, September 30, 2022
410,109
$
14.22
Unrecognized stock-based compensation related to the RSUs and RSAs issued through
September 30, 2022 was $
4
million and is
expected to be recognized over
1.9
years.
Note 10:
Income Tax
An income tax expense reconciliation at the statutory rate to the Company’s actual
income tax expense is shown below:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
Computed at the statutory rate (
21
%)
$
4,555
$
5,598
$
13,078
$
12,693
Increase (decrease) resulting from
Tax-exempt income
(903)
(828)
(2,647)
(2,830)
Non-deductible expenses
72
55
265
145
State income taxes
740
912
2,164
2,090
Equity based compensation
(47)
(40)
(201)
(157)
Other adjustments
(7)
(37)
(34)
(110)
Actual tax expense
$
4,410
$
5,660
$
12,625
$
11,831
Notes to Condensed Consolidated Financial Statements
(unaudited)
43
The tax effects of temporary differences related to deferred taxes located
in “other assets” on the Condensed Consolidated
Balance Sheets are presented below:
September 30, 2022
December 31, 2021
(Dollars in thousands)
Deferred tax assets
Net unrealized loss on securities available-for-sale
$
27,374
$
-
Allowance for credit losses
15,067
14,051
Lease incentive
467
508
Loan fees
3,645
3,227
Accrued expenses
2,438
2,735
Deferred compensation
1,969
2,418
State tax credit
-
1,033
Other
495
2,057
Total deferred tax asset
51,455
26,029
Deferred tax liability
Net unrealized gain on securities available-for-sale
-
(6,967)
FHLB stock basis
(735)
(757)
Premises and equipment
(2,209)
(2,602)
Other
(1,410)
(1,229)
Total deferred tax liability
(4,354)
(11,555)
Net deferred tax asset
$
47,101
$
14,474
Note 11:
Disclosures about Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between
market participants at the measurement date. Fair value measurements must
maximize the use of observable inputs and minimize the use
of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair
value:
Level 1
Quoted prices in active markets for identical assets or liabilities.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted
prices in
markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for
substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs supported by little or no market activity and significant to
the fair value of the assets or liabilities.
Notes to Condensed Consolidated Financial Statements
(unaudited)
44
Recurring Measurements
The following list presents the assets and liabilities recognized in the accompanying
Condensed Consolidated Balance Sheets
measured at fair value on a recurring basis and the level within the fair value
hierarchy in which the fair value measurements fall at
September 30, 2022 and December 31, 2021:
Fair Value Description
Valuation
Hierarchy
Level
Where Fair
Value Balance
Can Be Found
Available-for-
Sale Securities and
CRA Equity Security
Where quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy. If quoted market prices
are not available, then fair values are estimated by using quoted prices of
securities with similar characteristics or independent asset pricing services
and pricing models, the inputs of which are market-based or independently
sourced market parameters, including, but not limited to, yield curves,
interest rates, volatilities, prepayments, defaults, cumulative loss projections
and cash flows.
Level 2
Note 3:
Securities
Derivatives
Fair value of the interest rate swaps is obtained from independent pricing
services based on quoted market prices for similar derivative contracts.
Level 2
Note 5:
Derivatives and
Hedging
Non-recurring Measurements
The following tables present assets measured at fair value on a non-recurring
basis and the level within the fair value hierarchy in
which the fair value measurements fall at September 30, 2022 and December
31, 2021:
September 30, 2022
Fair Value Measurements Using
Fair Value
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Collateral-dependent loans
$
20,302
$
-
$
-
$
20,302
Foreclosed assets held-for-sale
$
1,588
$
-
$
-
$
1,588
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 non-recurring
basis and recognized in the accompanying Condensed Consolidated Balance Sheets.
Collateral-Dependent Loans, Net of ACL
The estimated fair value of collateral-dependent loans is based on the appraised
fair value of the collateral, less estimated cost to
sell. If the fair value of the collateral is below the loan’s amortized cost, the ACL is netted against the loan balance. Collateral-dependent
loans are classified within Level 3 of the fair value hierarchy.
Notes to Condensed Consolidated Financial Statements
(unaudited)
45
The Company considers the appraisal or evaluation as the starting point for determining
fair value and then considers other
factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral dependent
loans are
obtained when the loan is determined to be collateral dependent and subsequently
as deemed necessary by the Office of the Chief Credit
Officer.
Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved
appraisers maintained by management. The appraised values are reduced by discounts to
consider lack of marketability and estimated
cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts
and estimates are developed
by the Office of the Chief Credit Officer by comparison to historical results.
Foreclosed Assets Held-for-Sale
The fair value of foreclosed assets-held-for-sale is based on the appraised fair value of
the collateral, less estimated cost to sell.
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable
inputs used in non-recurring Level 3 fair value
measurements at September 30, 2022 and December 31, 2021:
September 30, 2022
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
-
%
-
100
%
Collateral dependent loans
20,302
(
21
)%
$
Market comparable
properties
Marketability
discount
Foreclosed assets held-for-sale
1,588
(
11
)%
December 31, 2021
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
7
%
-
100
%
Collateral-dependent impaired loans
38,046
(
26
)%
$
Market comparable
properties
Marketability
discount
Foreclosed assets held-for-sale
1,148
(
10
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
46
The following tables present the estimated fair values of the Company’s financial
 
instruments at September
55
Six Months Ended
June 30, 2022 and
December 31, 2021:
2023
September 30, 2022
CarryingAverage
Fair Value MeasurementsBalance
AmountInterest
Level 1Income /
Level 2Expense
Level 3Average
Yield /
Rate
(4)
Average
Balance
Interest
Income /
Expense
Average
Yield /
Rate
(4)
(Dollars in thousands)
Financial AssetsInterest-earning assets:
Cash and cash equivalentsSecurities - taxable
$
309,135302,763
$
309,1355,097
3.37
%
$
-220,783
$
-2,487
Available-for-sale securities2.26
656,527%
Securities - tax-exempt - FTE
(1)
527,047
8,912
3.38
543,873
9,120
3.35
Federal funds sold
873
6
1.39
-
656,527-
-
Interest-bearing deposits in other banks
170,287
3,617
4.28
253,771
521
0.41
Gross loans, net of unearned income
(2)(3)
5,658,698
188,600
6.72
4,385,664
90,055
4.14
Total interest-earning assets - FTE
(1)
6,659,668
$
206,232
6.24
%
5,404,091
$
102,183
3.81
%
Allowance for credit losses
(64,664)
(57,324)
Other non-interest-earning assets
226,983
207,881
Total assets
$
6,821,987
$
5,554,648
Interest-bearing liabilities
Transaction deposits
$
570,661
$
7,839
2.77
%
$
546,982
$
596
0.22
%
Savings and money market deposits
2,794,201
50,496
3.64
2,318,415
4,716
0.41
Time deposits
1,357,688
27,053
4.02
573,503
2,931
1.03
Total interest-bearing deposits
4,722,550
85,388
3.65
3,438,900
8,243
0.48
FHLB and short-term borrowings
311,471
6,423
4.16
280,883
2,477
1.78
Trust preferred securities, net of fair value
adjustments
1,070
114
21.49
1,018
56
11.11
Non-interest-bearing deposits
1,057,268
-
-
1,153,499
-
-
Cost of funds
6,092,359
$
91,925
3.04
%
4,874,300
$
10,776
0.44
%
Other liabilities
95,702
46,312
Stockholders’ equity
633,926
634,036
Total liabilities and stockholders’ equity
$
6,821,987
$
5,554,648
Net interest income - FTE
(1)
$
114,307
$
91,407
Net interest spread - FTE
(1)
3.20
%
3.37
%
Net interest margin - FTE
(1)
3.46
%
3.41
%
(1)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax
rate used is 21.0%.
(2)
Loans, net of allowanceunearned income include non-accrual loans of $13 million and $28 million as of June 30, 2023 and 2022, respectively.
(3)
Loan interest income includes loan fees of $7 million for credit lossesthe six-months ended June 30, 2023 and 2022.
4,621,782(4)
-Actual unrounded values are used to calculate the reported yield or rate. Accordingly, recalculations using the amounts in thousands as disclosed in this
-
4,599,659
Restricted equity securities
9,277
-
-
9,277
Interest receivable
20,553
-
20,553
-
Equity securities
4,022
-
1,969
2,053
Derivative assets
11,430
-
11,430
-
$
5,632,726
$
309,135
$
690,479
$
4,610,989
Financial Liabilities
Deposits
$
4,987,515
$
1,113,934
$
-
$
3,731,781
Federal Home Loan Bank line of credit
67,749
-
67,749
-
Federal Home Loan Bank advances
137,600
-
130,684
-
Other borrowings
1,048
-
1,875
-
Interest payable
2,318
-
2,318
-
Derivative liabilities
18,322
-
18,322
-
$
5,214,552
$
1,113,934
$
220,948
$
3,731,781
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
-
$
5,468,434
$
482,727
$
775,509
$
4,190,628
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
-
$
4,934,429
$
1,163,224
$
257,522
$
3,482,218
report may not produce the same amounts.
 
 
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
47
Note 12:
Commitments and Credit Risk
Commitments
The Company had the following commitments at September 30, 2022
and December 31, 2021:
September 30, 2022
December 31, 2021
(Dollars in thousands)
Commitments to originate loans
$
353,783
$
118,651
Standby letters of credit
56,791
51,114
Lines of credit
2,288,742
1,768,231
Future lease commitments
-
11,100
Commitments related to investment fund
3,947
2,067
$
2,703,263
$
1,951,163
Note 13:
Legal and Regulatory Proceedings
We accrue estimates for resolution of any legal and other contingencies when
losses are probable and reasonably estimable in
accordance with ASC 450,
Contingencies
("ASC 450"). No less than quarterly, and as facts and circumstances change, we review
the
status of each significant matter underlying a legal proceeding or claim and
assess our potential financial exposure. The Company
establishes reserves for litigation-related matters when it is probable
that a loss associated with a claim or proceeding has been incurred
and the amount of the loss can be reasonably estimated. If the assessment indicates
that a potentially material loss contingency is not
probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable and material, would
be disclosed. Loss contingencies considered remote are
generally not disclosed unless they involve guarantees, in which case the nature
of the guarantee would be disclosed.
Significant
judgment is required in both the determination of probability and the determination
as to whether the amount of an exposure is
reasonably estimable, and accruals are based only on the information available
to our management at the time the judgment is made,
which may prove to be incomplete or inaccurate or unanticipated events
and circumstances may occur that might cause us to change
those estimates and assumptions. Furthermore, the outcome of legal proceedings
is inherently uncertain, and we may incur substantial
defense costs and expenses defending any of these matters. Should any one or
a combination of more than one of these proceedings be
successful, or should we determine to settle any one or a combination of these
matters, we may be required to pay substantial sums,
become subject to the entry of an injunction or be forced to change the manner in
which we operate our business, which could have a
material adverse impact on our business, results of operations, cash flows or financial
condition.
The Company is subject to various legal proceedings and claims that arise primarily
in the ordinary course of business. At this
time, we do not believe the range of potential losses will have a material adverse effect on the
consolidated financial position, results of
operations and cash flows of the Company.
Note 14:
Leases
The Company’s leases primarily include bank branches located in
Kansas City, Missouri; Tulsa, Oklahoma; Dallas, Texas; Frisco,
Texas; and Phoenix, Arizona. The remaining lease terms on these branch leases range from less than
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 September 30, 2022, the
Company recognized one finance lease and the remaining Company
leases are classified as operating leases.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
48
Under ASC 842, a modified retrospective transition approach is required, applying the new standard to all leases existing at
the
date of initial application. The Company chose to use the adoption date of January 1, 2022, for ASC 842. As such, all periods presented
after January 1, 2022, are under ASC 842 whereas periods presented prior to January 1, 2022, are in accordance with prior
lease
accounting of ASC 840. Financial information was not updated, and the disclosures required under ASC 842 were not provided for dates
and periods before January 1, 2022.
 
The Company’s right to use an asset over the life of a lease is recorded as an ROU asset, is included
in “Other assets” on the56
Condensed Consolidated Balance Sheets and was $
29Net interest income
 
million at September 30, 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 Condensed Consolidated Balance Sheets of $
32-
 
Net interest income and net interest income - FTE increased $7.8 million at September 30, 2022.and $22.9 million
 
The Company was unable to determine the implicit rate in the leases and used the incremental borrowing
rate instead. The
Company used the FHLB yield curve on the lease commencement date and
selected the rate closest to the remaining lease term. The
remaining weighted-average lease term is
12.3
years, and the weighted-average discount rate was
2.39
% as of September 30, 2022.
The following table presents components of operating lease expense
in the accompanying Condensed Consolidated Statements of
Income for the three- and nine-monthsix-
month periods
ended June 30, 2023 compared to the same periods in 2022, respectively.
Compared to the second quarter of 2022, net
interest margin - FTE for the second quarter of 2023 decreased 25 basis points
.
For the six-months ended June 30, 2023 compared to
the same period in 2022, net interest margin - FTE increased 5 basis points.
Average earning assets totaled $6.8
billion for the three-month period ended June 30, 2023 and $6.7 billion
for the six-month period
ended June 30, 2023, resulting in increases
of $1.4 billion, or 25%, and $1.3 billion, or 23%, respectively, compared to the same
periods
in 2022, inclusive of the impact of acquisition of Farmers & Stockmens Bank,
which we refer to herein as the Colorado and New
Mexico acquisition. The increases
were driven by higher average loan and investment portfolio balances,
partially offset by lower
average cash balances for the three- and six-month periods ended SeptemberJune 30, 2023
 
compared to the corresponding periods in 2022.
The FTE yield on earning assets increased 2.41% from the second
quarter of 2022 to the second quarter of 2023 and increased 2.43% for
the six-months ended June 30, 2022:2023, compared to the same period in 2022
due to new loan production as well as repricing of variable
rate loans. The cost of funds increased 2.91% and 2.60% over the same periods due
to pricing pressure on deposits as well as client
migration into higher cost deposit products compared to the prior
year.
The Company currently anticipates net interest margin - FTE to remain
consistent with the current quarter and to be in a range of 3.20%
to 3.35% for the full year 2023.
Provision
For the Three Months Ended
September 30, 2022
For the NineSix Months Ended
SeptemberJune 30,
June 30,
2023
2022
2023
2022
(Dollars in thousands)
Finance lease amortization of right-of-use assetProvision for credit losses - loans
$
693,040
$
1611,690
Finance lease interest on lease liability$
698,036
115$
Operating lease expense1,374
Provision for credit losses - off-balance sheet
(400)
445
(975)
136
Allowance for credit losses - loans
67,567
55,817
67,567
55,817
Allowance for credit losses - off-balance sheet
7,713
5,320
7,713
5,320
Net charge-offs
$
603
1,932$
Variable lease expense
297
855
Short-term lease expense
5
15
Total lease expense1,104
$
1,0432,244
$
3,0782,185
The ACL increased $2.4 million during the quarter.
Provision expense of $3.0 million was primarily driven by loan growth and
was partially offset by $0.6 million in net charge-offs, primarily due
to two commercial and industrial loans.
The reserve on unfunded
commitments decreased $0.4 million due to a decrease in unfunded
commitments in the quarter.
The ACL increased $5.8 million during the six-months ended June 30, 2023 and included provision of $8.0 million due to loan
growth and changes in credit quality and economic factors and an increase
in reserves on impaired loans of $0.8 million, partially offset
by $2.2 million in net charge-offs.
The reserve on unfunded commitments decreased $1.0 million due
to a decrease in unfunded
commitments.
Future minimum commitments due under these lease agreements as of
 
September 30, 2022 are as follows:
Operating Leases
Finance Lease
(Dollars in thousands)
Remainder of 2022
$
762
$
123
2023
3,070
490
2024
2,793
490
2025
2,804
490
2026
2,836
490
Thereafter
15,243
8,823
Total lease payments
$
27,508
$
10,906
Less imputed interest
2,965
3,232
Total
$
24,543
$
7,674
Supplemental cash flow information –
Operating cash flows paid for operating lease amounts included in the measurement
 
of
lease liabilities was $
0.7
 
million and $
2.2
 
million for the three- and nine-months ended September 30, 2022, respectively. Operating
cash flows paid for finance lease amounts included in the measurement of
 
lease liabilities was $
0.1
 
million and $
0.2
 
million for the
three-
 
and nine-month periods ended September 30, 2022, respectively. During the
 
three- and nine-months ended September 30 2022,
the Company did
no
t record any ROU assets that were exchanged for operating lease liabilities.
Notes to Condensed Consolidated Financial Statements
(unaudited)
49
Note 15:
 
Stock Warrants
During the nine-month period ended September 30, 2022,
33,500
 
warrants were exercised at a strike price of $
5.00
 
per share and
33,500
 
common shares were issued.
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 September 30, 2022 and December 31, 2021, respectively.
 
The
80,000
 
warrants expire on April 26, 2023.
Note 16:
 
Subsequent Events
On November 7, 2022, the Company announced its receipt of regulatory
 
approval from the Federal Deposit Insurance
Corporation to complete the previously announced acquisition of Central Bancorp,
 
Inc.’s (“Central”) bank subsidiary, Farmers &
Stockmens Bank (“F&S Bank”).
 
The Company and Central expect to complete the merger during the fourth
 
quarter of 2022 pending
satisfaction or waiver of customary closing conditions set forth in the agreement.
 
50
ITEM 2. MANAGEMENT’S DISCUSSION AND
 
ANALYSIS OF FINANCIAL
 
CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
 
with the consolidated financial statements and related notes
and with the statistical information and financial data appearing in this report
 
as well as in the Company’s Annual Report on Form 10-K
for the fiscal year ended December 31, 2021 filed with the Securities and Exchange
 
Commission (“SEC”) on February 28, 2022 (the
“2021 Form 10-K”). Results of operations for the three-
 
and nine-month periods ended September 30, 2022 are not necessarily
indicative of results to be attained for any other period. Certain statements in this report
 
contain forward-looking statements regarding
our plans, objectives, beliefs, expectations, representations,
 
and projections.
 
See “Forward-Looking Information”
 
which is incorporated
herein by reference.
Third Quarter 2022 Highlights
During the third quarter ended September 30, 2022, we accomplished
 
the following:
•
$5.8 billion of assets with 5% operating revenue
(1)
 
growth compared to the second quarter of 2022;
•
$149 million or 3.3% of total loan growth from the previous quarter and
 
$445 million or 10.5% loan growth from the same
quarter last year;
•
Continued improvement in credit quality during the third quarter of 2022
 
as evidenced by the decrease in non-performing
assets to total assets ratio from 0.92% at September 30, 2021 to 0.31% at September
 
30, 2022;
 
•
Return on Average Assets of 1.19% and a Return on Equity of 11.18%
for the quarter ended September 30, 2022; and
•
Net Interest Margin (Fully Tax-Equivalent)
(2)
of 3.56% for the quarter ended September 30, 2022, compared to 3.23% for the
same quarter last year.
(1)
Net interest income plus non-interest income
(2)
The Company modified the yield calculation. Refer to the section “Update to Net Interest Margin Methodology” below for additional information.
Acquisition Update
As previously disclosed, during the second quarter of 2022 the Company entered
into an agreement to acquire Farmers &
Stockmens Bank for approximately $75 million, subject to
the satisfaction or waiver of customary closing conditions. The Company
believes the acquisition will advance its expansion strategy with access to
Colorado and New Mexico while deploying a portion of the
Bank’s capital. The Company believes that the acquisition will increase core deposits and
enhance the Company’s SBA lending and
mortgage operations. The Company anticipates the acquisition will close
during the fourth quarter of 2022 with system integration
occurring in 2023. Refer to “Note 16: Subsequent Events” within the Notes
to Condensed Consolidated Financial Statements
(unaudited) for further information about the acquisition.
Interest Rate Risk Management
The Company is monitoring interest rate sensitivity closely as $3.6
billion or 62% of earning assets mature or reprice within the
twelve-month period following September 30, 2022, including
$2.8 billion that reprices in the first month. $3.8 billion of interest-
bearing liabilities mature or reprice over the same twelve-month
period. The Company is reviewing additional options to manage
balance sheet sensitivity in the event interest rates decline in early 2024.
Credit Quality
Credit quality metrics generally improved during the third quarter
of 2022. Classified loans decreased $8 million from the prior
quarter to $72 million at September 30, 2022. Non-performing assets declined
from $31 million at June 30, 2022 to $18 million at
September 30, 2022. Net charge-offs for the three-month period
ended September 30, 2022 were $2 million, or 0.16% of average loans.
The Company continues to monitor the U.S. economic indicators, including
the inflation rate, commodity prices, interest rates,
and potential supply chain disruptions and the impact it may have on the
Company’s markets, clients, and prospects. The Company is
monitoring the impact of a rising interest rate environment on the commercial
real estate market and enterprise and leverage loans that is
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5157
currently mitigated by low debt-to-equity ratios.Non-Interest Income
AsThe components of Septembernon-interest income were as follows for the periods shown:
Three Months Ended
Six Months Ended
June 30, 2022, the Company did not identify any systemic issues within its
loan portfolio that would significantly affect the credit quality of the loan portfolio.
 
Update to Net Interest Margin MethodologyJune 30,
Change
Change
2023
2022
$
%
2023
2022
$
%
(Dollars in thousands)
Service charges and fees on customer
accounts
$
2,110
$
1,546
$
564
36
%
$
3,939
$
2,954
$
985
33
%
ATM and credit card interchange income
1,213
1,521
(308)
(20)
2,477
4,185
(1,708)
(41)
Realized gains (losses) on available-for-sale
securities
-
(12)
12
N/M
63
(38)
101
N/M
Gain on sale of loans
1,205
-
1,205
N/M
1,392
-
1,392
N/M
Gains (losses) on equity securities, net
6
(71)
77
N/M
16
(174)
190
N/M
Income from bank-owned life insurance
418
407
11
3
829
795
34
4
Swap fees and credit valuation adjustments,
net
84
12
72
600
174
130
44
34
Other non-interest income
743
798
(55)
(7)
1,310
1,291
19
1
Total non-interest income
$
5,779
$
4,201
$
1,578
38
%
$
10,200
$
9,143
$
1,057
12
%
The Company modifiedchanges in non-interest income were driven primarily by the yield calculationfollowing:
Service charges and fees on the available-for-salecustomer accounts
 
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- The increases
 
for the change in
methodology. The following changes were made:
◾
The average unrealized gain (loss) on available-for-sale securities balance was removedthree-
 
from and six-month periods ended June 30, 2023 compared to
the security lines and placedcorresponding periods in
other non-interest earning assets.
◾
The annualization method was changed from Actual/Actual to 30/360 for the security yields.
The Company believes the new calculation provides better insight into 2022 were driven primarily by increas
 
whyes in account analysis fees due to increased client volume from new
markets and acquired accounts as well as various fee increases on commercial
accounts.
ATM and credit card interchange income
- The decrease in ATM and credit card interchange income was driven primarily by a
decrease in credit card fees due to one large customer with pandemic-related
activity that did not occur in the security yields and net interest margin changed
period-to-period.current year.
 
ImpactGain on sale of loans
– The increase for the three- and six-month periods ended June 30, 2023 compared to Yieldthe same periods
for 2022
Forwere primarily due to SBA loan sale activity. Our SBA lending team is a specialty lending vertical we augmented from the Quarter EndedColorado and
ForNew Mexico acquisition in 2022.
Non-Interest Expense
The components of non-interest expense were as follows for the Nineperiods indicated:
Three Months Ended
September 30,Six Months Ended
June 30,
March 31,June 30,
December 31,Change
September 30,Change
September 30,
September 30,
Lines Impacted2023
2022
2022$
%
2023
2022
2021
2021
2022
2021
Previous calculation
Yield on securities - taxable
2.50$
%
2.77(Dollars in thousands)
Salaries and employee benefits
$
24,061
$
17,095
$
6,966
41
%
2.20$
46,683
$
35,036
$
11,647
33
%
2.11Occupancy
3,054
2,622
432
16
6,028
5,115
913
18
Professional fees
970
1,068
(98)
(9)
3,588
1,873
1,715
92
Deposit insurance premiums
1,881
713
1,168
164
3,412
1,450
1,962
135
Data processing
1,057
1,160
(103)
(9)
2,299
1,972
327
17
Advertising
649
757
(108)
(14)
1,401
1,449
(48)
(3)
Software and communication
1,655
1,198
457
38
3,306
2,468
838
34
Foreclosed assets, net
(21)
15
(36)
N/M
128
(38)
166
N/M
Other non-interest expense
3,304
4,555
(1,251)
(27)
7,035
7,505
(470)
(6)
Core deposit intangible amortization
802
20
782
3,910
1,624
39
1,585
4,064
Total non-interest expense
$
37,412
$
29,203
$
8,209
28
%
1.96$
75,504
$
56,869
$
18,635
33
%
2.41
%
1.87
%
Yield on securities - tax-exempt
(1)
3.64
3.46
3.31
3.17
3.20
3.51
3.32
Total securities yield
(1)
3.33
3.29
3.00
2.89
2.87
3.20
2.90
Yield on interest-earning assets
(1)
4.73
4.01
3.64
3.70
3.62
4.14
3.56
Net interest spread
(1)
3.50
3.51
3.25
3.22
3.16
3.42
3.06
Net interest margin
(1)
3.60
3.55
3.29
3.28
3.20
3.48
3.10
As calculated going forward
Yield on securities - taxable
2.32
2.35
2.15
2.14
2.01
2.28
1.91
Yield on securities - tax-exempt
(1)
3.37
3.36
3.35
3.35
3.43
3.36
3.52
Total securities yield
(1)
3.07
3.07
3.00
3.02
3.04
3.05
3.04
Yield on interest-earning assets
(1)
4.68
3.98
3.64
3.72
3.64
4.11
3.58
Net interest spread
(1)
3.45
3.48
3.25
3.24
3.18
3.39
3.08
Net interest margin
(1)
3.56
3.52
3.29
3.30
3.23
3.46
3.12
Change
Yield on securities - taxable
(0.18)
(0.42)
(0.05)
0.03
0.05
(0.13)
0.04
Yield on securities - tax-exempt
(1)
(0.27)
(0.10)
0.04
0.18
0.23
(0.15)
0.20
Total securities yield
(1)
(0.26)
(0.22)
-
0.13
0.17
(0.15)
0.14
Yield on interest-earning assets
(1)
(0.05)
(0.03)
-
0.02
0.02
(0.03)
0.02
Net interest spread
(1)
(0.05)
(0.03)
-
0.02
0.02
(0.03)
0.02
Net interest margin
(1)
(0.04)
%
(0.03)
%
-
%
0.02
%
0.03
%
(0.02)
%
0.02
%
(1)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are
exempt from Federal income taxes. The
incremental tax rate used is 21.0%.
Update to Customer Concentrations
As of September 30, 2022, the Company’s
top 20 customer relationships represented approximately 24% or $1.2
billion of total
deposits. The Company believes that there are sufficient
funding sources, including on-balance sheet liquid assets and wholesale deposit
options, so that an immediate reduction in these deposit balances would
not be expected to have a material, detrimental effect on the
Company’s financial position
or operations.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5258
Performance MeasuresNon-interest expense increased $8.2 million and $18.6 million
for the three- and six-month periods ended June 30, 2023
Ascompared to the same periods
in 2022. The second quarter of or2023 included $0.3 million of acquisition-related expenses, most of
which
were included in professional fees, and $1.3 million of employee separation costs included
in salaries and employee benefits. The six-
months ended June 30, 2023 included $1.8 million of acquisition-related
expenses, most of which were included in professional fees,
and $1.3 million of employee separation costs included in salaries and
employee benefits.
The three-
and six-month periods ended June
30, 2022 included $0.2 million of acquisition-related expenses, most of which
were included in professional fees, and $1.0 million of
employee separation costs included in other non-interest expense. The changes
in non-interest expense were driven primarily by the
following:
Salary and Employee Benefits
– For both the three- and six-months ended June 30, 2023 as compared to the
same periods in the prior
year, excluding the employee separation costs in 2023 previously mentioned
above, increases were primarily due to the addition of
employees from the Colorado and New Mexico acquisition, hiring
in new markets and merit increases.
Occupancy
– For both comparative periods,
the increases
in occupancy costs was driven by the addition of a second location in Dallas,
Texas and new properties
in Colorado and New Mexico.
Professional Fees
– Professional fees for both the three-
and six-months ended June 30, 2023 were consistent with the prior year
periods after adjusting for the acquisition related costs.
Deposit Insurance Premiums
– The increase in deposit insurance premiums was due to an increase in the assessment rate and
increases
in assets for both comparative periods.
Software and communication
– For both the three-
and six-months ended June 30, 2023 as compared to the same periods in the prior
year, increases in software and communications were due to technology
for additional employees and clients as well as new technology
implementation.
Other Non-interest Expense
– For the Quarter Endedthree-months ended June 30, 2023 compared to the same period
in 2022, the decrease was due to
As of oremployee separation costs in 2022. For the Nine Months Ended
September 30,
six-months ended June 30, 2023
as compared to the same period in the prior year, the
March 31,decrease for employee separation costs was partially offset by increased
post-pandemic travel expenses
and transaction fraud-related
December 31,losses.
SeptemberCore Deposit Intangible Amortization
– For both the three-
and six-months ended June 30, 2023 as compared to the same periods in
September 30,the prior year, increases
were due to expense related to the Colorado and New Mexico acquisition.
September 30,We currently anticipate non-interest expense to be in a range of $34 to $35 million
per quarter for the remainder of 2023. The
2022efficiency ratios were 62.02% and 61.41% and the adjusted efficiency ratios
2022
2022
2021
2021
2022
2021
(Dollars in thousands, except per share data)
Return on average assets
(1)
1.19
%
1.12
%
1.23
%
1.50
%
1.54
%
1.18
%
1.16
%
Return on average equity
(1)
11.18
%
10.15
%
10.44
%
12.57
%
12.92
%
10.59
%
10.24
%
Earnings per share
$
0.35
$
0.31
$
0.33
$
0.41
$
0.41
$
1.00
$
0.95
Diluted earnings per share
$
0.35
$
0.31
$
0.33
$
0.40
$
0.41
$
0.99
$
0.93
Efficiency
(2)
53.20
%
57.36
%
57.57
%
55.38
%
59.06
%
55.97
%
54.18
%
Ratio of equity to assets
9.93
%
10.65
%
11.29
%
11.88
%
12.08
%
9.93
%
12.08
%– FTE
(1)
 
Interimwere 57.27%
and 56.84% for the three- and six-
month periods annualized
(2)
ended June 30, 2023,
 
We calculate efficiency ratio as non-interest expenserespectively.
(1)
Represents a non-GAAP financial measure.
 
divided by the sumSee "Non-GAAP Financial Measures"
below for a reconciliation of net interest income and
non-interest income.these measures.
Results of Operations
Net Interest Income
Net interest income is presented on a tax-equivalent basis below. Presentation
on a tax-equivalent basis reflects all income as taxable at the same rate. For example, $100
of
tax-exempt income would be presented as $121.00, which represents the
tax-exempt income amount plus the tax at the statutory federal income tax rate of 21%. We
believe a tax-
equivalent basis provides for improved comparability between the various
earning assets.
Taxes
For the QuarterThree Months Ended
For the NineSix Months Ended
SeptemberJune 30,
 
June 30,
 
March 31,2023
2022
2023
2022
(Dollars in thousands)
Income tax expense
$
4,219
$
4,027
$
8,240
$
8,215
Income before income taxes
20,266
19,572
40,395
40,588
Effective tax rate
21
%
21
%
20
%
20
%
Our income tax expense differs from the amount that would be calculated
using the federal statutory tax rate, primarily from
investments in tax advantaged assets, including bank-owned
life insurance and tax-exempt municipal securities;
state tax credits;
and
permanent tax differences from equity-based compensation. Refer to “Note
8: Income Tax” within the notes to consolidated financial
statements – unaudited for a reconciliation of the statutory rate to the Company’s
actual income tax expense.
 
December 31,59
During the three- and six-month periods
 
Septemberended June 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Yield on securities - tax-equivalent
(1)
3.07
%
3.07
%
3.00
%
3.02
%
3.04
%
3.05
%
3.04
%
Yield on loans
5.08
4.28
4.00
4.17
4.00
4.47
3.98
Yield on earning assets - tax-equivalent
(1)
4.68
3.98
3.64
3.72
3.64
4.11
3.58
Cost of interest-bearing deposits
1.56
0.56
0.41
0.43
0.47
0.87
0.51
Cost of total deposits
1.20
0.42
0.31
0.33
0.38
0.66
0.42
Cost of FHLB 2023 and short-term borrowings
2.18
1.66
1.95
3.03
1.82
1.87
1.80
Cost of funds
1.23
0.50
0.39
0.48
0.46
0.72
0.50
Net interest margin - tax-equivalent
(1)
3.56
%
3.52
%
3.29
%
3.30
%
3.23
%
3.46
%
3.12
%
(1)
Tax-exempt income is calculated on a tax-equivalent
basis. Tax-free municipal securities are exempt
from Federal income taxes. The incremental
2022, the Company’s effective tax rate used is 21%.benefited primarily
from permanent tax differences related to tax-exempt interest.
We currently anticipate the Company’s effective tax rate to remain
within
the 20% to 22% range in the near term.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5360
The following tables present, for the periods indicated, average balanceNon-GAAP Financial Measures
In addition to disclosing financial measures determined in accordance
 
sheetwith U.S. generally accepted accounting principles (GAAP), the Company
discloses certain non-GAAP
financial measures including “tangible common stockholders’ equity,” “tangible book value per common share,” “adjusted
efficiency ratio – FTE,” “adjusted net income,” “adjusted
earnings per common share – diluted,” “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 interest income, interest expense
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 correspondingindividual components may be considered
 
average yield and rateswhen
paid:
analyzing our performance.
ThreeA reconciliation of non-GAAP financial measures to the comparable GAAP financial measures follows.
Quarter Ended
Six Months Ended
September 30, 6/30/2023
3/31/2023
12/31/2022
September 30, 20219/30/2022
Average Balance6/30/2022
Interest Income6/30/2023
/ Expense
Average Yield /
Rate
(1)
Average Balance
Interest Income
/ Expense
Average Yield /
Rate
(1)6/30/2022
(Dollars in thousands)thousands, except per share data)
Interest-earning assets:Adjusted net income:
Securities - taxableNet income (GAAP)
$
213,77516,047
$
1,241
2.32
%16,108
$
191,63611,946
$
964
2.01
%
Securities - tax-exempt
(2)
560,541
4,725
3.37
502,107
4,310
3.43
Interest-bearing deposits in other banks
231,345
1,193
2.05
313,188
121
0.15
Gross loans, net of unearned income
(3)(4)
4,626,684
59,211
5.08
4,230,553
42,664
4.00
Total interest-earning assets
(2)
5,632,34517,280
$
66,370
4.68
%
5,237,48415,545
$
48,059
3.64
%
Allowance for credit losses
(56,995)
(75,103)
Other non-interest-earning assets
188,997
246,603
Total assets32,155
$
5,764,34732,373
$Add: Acquisition costs
5,408,984338
Interest-bearing liabilities1,477
Transaction deposits3,570
$81
531,999239
$1,815
1,539239
1.95Add: Acquisition - Day 1 CECL
%
$
510,823
$
259
0.20
%
Savings and money market deposits
2,519,574
10,568
1.66
2,276,436
1,907
0.33
Time deposits
733,607
2,802
1.52
752,012
2,045
1.08
Total interest-bearing deposits
3,785,180
14,909
1.56
3,539,271
4,211
0.47
FHLB and short-term borrowings
165,196
907
2.18
278,154
1,275
1.82
Trust preferred securities, net of fair value
adjustments
1,037
39
14.58
988
24
9.63
Non-interest-bearing deposits
1,137,626provision
-
-
909,7504,400
-
-
Cost of funds-
5,089,039-
Add: Employee separation
1,300
-
-
-
1,063
1,300
1,063
Less: Tax effect
(1)
(344)
(310)
(2,045)
(17)
(273)
(654)
(273)
Adjusted net income
$
15,855
1.23
%
4,728,16317,341
$
5,510
0.46
%
Other liabilities
62,102
36,106
Stockholders’ equity
613,206
644,715
Total liabilities and stockholders’ equity17,275
$
5,764,34717,871
$
5,408,984
Net interest income - tax-equivalent
(2)17,344
$
50,51516,574
$
42,54934,616
Net interest spread - tax-equivalent$
(2)33,402
3.46Preferred stock dividends
%$
3.18103
%$
Net interest margin - tax-equivalent
(2)$
3.56-
%$
3.23-
%$
-
103
-
Diluted weighted average common shares outstanding
48,943,325
49,043,621
49,165,578
49,725,207
50,203,725
48,994,807
50,561,868
Earnings per common share – diluted (GAAP)
$
0.33
$
0.33
$
0.24
$
0.35
$
0.31
$
0.65
$
0.64
Adjusted earnings per common share – diluted
$
0.35
$
0.35
$
0.36
$
0.35
$
0.33
$
0.70
$
0.66
(1)
Actual unrounded values are used to calculateRepresents the reported yield or rate. Accordingly, recalculations usingtax impact of the amounts in thousands as disclosed in this report may not produce the same amounts.
(2)
Tax exempt income is calculated onadjustments at a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incrementalrate
of 21.0%, plus permanent tax rate used is 21.0%.expense associated with
(3)
Loans, net of unearned income include non-accrual loans of $17 million and $48 million as of September 30, 2022 and 2021, respectively.
(4)
Loan interest income includes loan fees of $3 million and $4 million for the three months ended September 30, 2022 and 2021, respectively.merger related transactions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5461
NineQuarter Ended
Six Months Ended
September 30, 6/30/2023
3/31/2023
12/31/2022
September 30, 20219/30/2022
Average Balance6/30/2022
Interest Income6/30/2023
/ Expense
Average Yield /
Rate
(1)
Average Balance
Interest Income
/ Expense
Average Yield /
Rate
(1)6/30/2022
(Dollars in thousands)
Interest-earningAdjusted return on average assets:
Securities - taxableNet income (GAAP)
$
218,42116,047
$
3,728
2.28
%16,108
$
203,63311,946
$
2,911
1.91
%
Securities - tax-exempt
(2)
549,490
13,845
3.36
476,980
12,596
3.52
Interest-bearing deposits in other banks
246,213
1,714
0.93
390,588
359
0.12
Gross loans, net of unearned income
(3)(4)
4,466,887
149,266
4.47
4,381,213
130,268
3.98
Total interest-earning assets
(2)
5,481,01117,280
$
168,553
4.11
%
5,452,41415,545
$
146,13432,155
3.58$
%32,373
Allowance for credit lossesAdjusted net income
(57,213)17,341
(76,726)17,275
Other non-interest-earning assets17,871
201,51917,344
249,81616,574
Total34,616
33,402
Average assets
$
5,625,3176,929,972
$
5,625,504
Interest-bearing liabilities
Transaction deposits6,712,801
$
541,9336,159,783
$
2,1345,764,347
0.89$
5,545,657
$
6,821,987
$
5,554,648
Return on average assets (GAAP)
0.93
%
$
629,959
$
936
0.200.97
%
Savings and money market deposits0.77
2,386,205%
15,2851.19
0.86%
2,360,5591.12
6,402%
0.360.95
Time deposits%
627,4581.18
5,733%
1.22Adjusted return on average assets
863,5921.00
7,451%
1.04
%
1.15
Total interest-bearing deposits%
3,555,596
23,152
0.87
3,854,110
14,789
0.51
FHLB and short-term borrowings
241,897
3,385
1.87
285,371
3,841
1.80
Trust preferred securities, net of fair value
adjustments
1,024
94
12.29
976
72
9.80
Non-interest-bearing deposits
1,148,150
-
-
814,924
-
-
Cost of funds
4,946,667
$
26,631
0.721.19
%
4,955,381
$
18,702
0.501.20
%
Other liabilities
51,634
35,385
Stockholders’ equity
627,016
634,738
Total liabilities and stockholders’ equity
$
5,625,317
$
5,625,504
Net interest income - tax-equivalent
(2)
$
141,922
$
127,432
Net interest spread - tax-equivalent
(2)
3.391.02
%
3.081.21
%
Net interest margin - tax-equivalentQuarter Ended
(2)
3.46
%
3.12
%
(1)
Actual unrounded values are used to calculate the reported yield or rate. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts.
(2)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%.
(3)
Loans, net of unearned income include non-accrual loans of $17 million and $48 million as of September 30, 2022 and 2021, respectively.
(4)
Loan interest income includes loan fees of $10 million and $13 million for the nine months ended September 30, 2022 and 2021, respectively.
55
Changes in interest income and interest expense result from changes in average
balances (volume) of interest earning assets and interest-bearing
liabilities, as well as changes
in average interest rates. The following table sets forth the effects of changing rates and volumes
on our net interest income during the periods shown. Information is provided
with
respect to: (i) changes in volume (change in volume times old rate); (ii) changes
in rates (change in rate times old volume); and (iii) changes in rate/volume (change
in rate times the
change in volume).
ThreeSix Months Ended
Nine Months Ended6/30/2023
September 30, 2022 over 20213/31/2023
September 30, 12/31/2022 over 2021
Average Volume9/30/2022
Yield/Rate6/30/2022
Net Change6/30/2023
(1)
Average Volume
Yield/Rate
Net Change
(1)6/30/2022
(Dollars in thousands)
Interest IncomeAdjusted return on average common equity:
Securities - taxableNet income (GAAP)
$
11916,047
$
15816,108
$
27711,946
$
22217,280
$
59515,545
$
817
Securities - tax-exempt
(2)
501
(86)
415
1,840
(591)
1,249
Interest-bearing deposits in other banks
(39)
1,111
1,072
(176)
1,531
1,355
Gross loans, net of unearned income
4,251
12,296
16,547
2,604
16,394
18,998
Total interest income
(2)32,155
$
4,83232,373
Preferred stock dividends
103
-
-
-
-
103
-
Net income attributable to common shareholders (GAAP)
$
13,47915,944
$
18,31116,108
$
4,49011,946
$
17,92917,280
$
22,419
Interest Expense
Transaction deposits15,545
$
532,052
$
1,27532,373
Adjusted net income
$
1,28017,341
$
(207)17,275
$
1,40517,871
$
1,198
Savings and money market deposits
223
8,438
8,661
69
8,814
8,883
Time deposits
(49)
806
757
(2,145)
427
(1,718)
Total interest-bearing deposits
179
10,519
10,698
(2,283)
10,646
8,363
FHLB and short-term borrowings
(583)
215
(368)
(601)
145
(456)
Trust preferred securities, net of fair value adjustments
1
14
15
4
18
22
Total interest expense
(403)
10,748
10,345
(2,880)
10,809
7,929
Net interest income
(2)17,344
$
5,23516,574
$
2,73134,616
$
7,96633,402
Preferred stock dividends
103
-
-
-
-
103
-
Adjusted net income attributable to common shareholders
$
7,37017,238
$
7,12017,275
$
14,49017,871
(1)$
The change in interest not due solely to volume or rate has been allocated in proportion to the respective absolute dollar amounts of the change in volume or rate.17,344
(2)$
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%.16,574
Interest income -$
Interest income increased for the three-
and nine-month periods ended September 30, 2022 compared to the same periods
in 2021 driven by higher average loans34,513
outstanding and higher interest rates. The yield on taxable securities benefited from a slowdown
in mortgage-backed securities (“MBS”) prepayments
that reduced the premium$
amortization on MBS by $0.2 million and $0.7 million for the three-
and nine-month periods ended September 30, 2022, respectively.
The loan yield for the three-month period
ended September 30, 2022, benefited from $1.0 million in interest income
related to recoveries of interest income and loans placed back on accrual status.
Loan yields for the three-
and nine-month periods ended September 30, 2022 compared to the corresponding
periods in 2021 were partially offset by lower PPP loan fees of $1.5 million and $4.8 million,
respectively.33,402
Average earning assets totaled $5.6
billion for the three-month period ended September 30, 2022 and $5.5 billion
for the nine-month period ended September 30, 2022, resulting incommon equity
increases of $395 million or 8% and $29 million or 1%, respectively compared$
639,741
to the same periods in 2021. The increases were driven by higher
$
619,952
$
589,587
$
613,206
$
614,541
$
629,901
$
634,036
Return on average gross loanscommon equity (GAAP)
10.00
,
%
10.54
%
8.04
%
11.18
%
10.15
%
10.26
%
10.30
%
Adjusted return on average taxable
common equity
10.81
%
11.30
%
12.03
%
11.22
%
10.82
%
11.05
%
10.62
%
56
securities,
and average tax-exempt securities, partially offset by a reduction
in average interest-bearing deposits in other banks for the three-
and nine-month periods ended
September 30, 2022 compared to the corresponding periods in 2021.
Interest expense
- Interest expense increased for the three-month period
ended September 30, 2022 compared to the same period in 2021 due to higher interest rates and
higher
average interest-bearing deposits. Interest expense increased for
the nine-month period ended September 30, 2022 compared to the same period
in 2021 due to higher interest rates,
partially offset by lower average interest-bearing deposits.
Average interest-bearing
deposits for the three-month period ended September 30, 2022 increased $246 million
or 7% compared to the same period in the prior year.
Average
interest-bearing deposits for the nine-month period ended September
30, 2022 decreased $299 million or 8% compared to the same period in the 2021. For the
three-
and nine-month
periods
ended September 30, 2022 non-interest-bearing deposits increased compared
to the corresponding periods in 2021.
Net interest income
- Net interest income increased for the three-
and nine-month periods ended September 30, 2022 compared to the same periods in 2021
driven by interest-
earning assets repricing quicker than the cost of interest-bearing
liabilities as variable rate loans tied to 30-day London Interbank Offered Rate (“LIBOR”) and
Secured Overnight
Financing Rate (“SOFR”) rates were rising faster than the Company’s deposit rates
that are typically adjusted when the federal funds rate changes.
The Company currently
anticipates net interest margin for the fourth quarter of 2022 to be in the range
of 3.45% to 3.55% because of the Company’s variable-rate assets and the rising rate environment,
although deposit migration and remaining pressure on loan pricing
are expected to be headwinds.
Impact of Transition Away from LIBOR
The Company had $735 million in loans tied to LIBOR at September
30, 2022. Starting in October 2021, the Company began limiting loans originated using
the LIBOR
index. For current borrowers, the Company is modifying loan document
language to account for the transition away from LIBOR as loans renew or
originate. The Company plans to
replace LIBOR-based loans with the Secured Overnight Financing
Rate (“SOFR”). At September 30, 2022, the Company had approximately $959 million in loans tied to SOFR. The
Company adopted Accounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform (Topic 848):
Facilitation of the Effects of Reference Rate Reform on Financial
Reporting” in 2020. The ASU allows the Company to recognize the modification related to LIBOR as a continuation of
the old contract, rather than a cancellation of the old contract
resulting in a write-off of unamortized fees and creation of a new contract.
Non-Interest Income
For the Quarter Ended
For the Nine Months Ended6/30/2023
September 30,
3/31/2023
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
12/31/2022
9/30/2022
6/30/2022
2021
2021
2022
2021
(Dollars in thousands)thousands, except per share data)
Tangible common stockholders' equity:
Total non-interest income (expense)stockholders' equity (GAAP)
$
3,780651,483
$
4,201645,491
$
4,942608,599
$
4,796580,547
$
(1,105)608,016
Less: goodwill and other intangible assets
27,457
28,259
29,081
71
91
Less: preferred stock
7,750
7,750
-
-
-
Tangible common stockholders' equity
$
12,922616,276
$
8,864609,482
Non-interest income (expense) to average assets$
(1)579,518
0.26$
%580,476
0.30$
%607,925
0.36Tangible book value per common share:
%Tangible common stockholders' equity
0.34$
%616,276
(0.08)$
%609,482
0.31$
%579,518
0.21$
%580,476
(1)$
Interim periods annualized.607,925
Common shares outstanding at end of period
48,653,487
48,600,618
48,448,215
48,787,696
49,535,949
Book value per common share (GAAP)
$
13.39
$
13.28
$
12.56
$
11.90
$
12.27
Tangible book value per common share
$
12.67
$
12.54
$
11.96
$
11.90
$
12.27
57
The components of non-interest income were as follows for the periods
shown:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Change
Change
2022
2021
$
%
2022
2021
$
%
(Dollars in thousands)
Service charges and fees on customer accounts
$
1,566
$
1,196
$
370
31
%
$
4,520
$
3,330
$
1,190
36
%
Realized gains (losses) on available-for-sale securities
(4)
1,046
(1,050)
NM
(43)
1,043
(1,086)
NM
Unrealized gains (losses), net on equity securities
(87)
(6,210)
6,123
(99)
(261)
(6,243)
5,982
(96)
Income from bank-owned life insurance
405
427
(22)
(5)
1,200
3,088
(1,888)
(61)
Swap fees and credit valuation adjustments, net
(7)
31
(38)
NM
123
156
(33)
(21)
ATM and credit card interchange income
1,326
1,735
(409)
(24)
5,513
5,569
(56)
(1)
Other non-interest income
581
670
(89)
(13)
1,870
1,921
(51)
(3)
Total non-interest income (loss)
$
3,780
$
(1,105)
$
4,885
NM
%
$
12,922
$
8,864
$
4,058
46
%
The changes in non-interest income were driven primarily by the following:
Service charges and fees on customer accounts
- This category includes account analysis fees, partially offset by a customer rebate
program. The increase for the three- and nine-
month periods ended September 30, 2022 compared to the corresponding
periods
in 2021 was driven primarily by increases in account analysis fees due to customer growth
,
increases
in outstanding balances, and adjustments to the Company’s fee structure.
Realized gains (losses) on available-for-sale securities
– The decrease for the three- and nine-months ended September 30, 2022 compared
to the same periods for 2021 was due to
the sale of $16 million in tax-exempt securities during the three-
and nine-month periods
ended September 30, 2021 at a gain due to increases in interest rates.
Unrealized gains (losses), net on equity securities
- The increase for the three- and nine-months ended September 30, 2022 compared
to the same periods for 2021 was due to the
Company recording a $6 million unrealized loss during the third quarter
of 2021 related to an equity investment received as part of a modified loan agreement.
Income from bank-owned life insurance (“BOLI”)
– The decline in BOLI income for the nine-months ended September 30, 2022 compared to
the same period in 2021 related to
the recognition of $1.8 million in tax-free death benefits from a BOLI policy
during 2021 compared to no such proceeds for 2022.
ATM and credit card interchange income
- The decrease in ATM and credit card interchange income for the three- and nine-month periods ended September 30, 2022 compared
to
the same periods
in 2021 was driven primarily by a decrease in credit card interest income
associated with customers that mobilized their workforce during the
COVID-19 pandemic
in 2021, partially offset by customer growth.
58
Non-Interest Expense
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
(1)
(Dollars in thousands)
Total non-interest expense
$
28,451
$
29,203
$
27,666
$
26,715
$
24,036
$
85,319
$
72,667
Non-interest expense to average assets
(1)
1.96
%
2.11
%
2.02
%
1.93
%
1.76
%
2.03
%
1.73
%
(1)
Interim periods annualized.
The components of non-interest expense were as follows for the periods indicated:
Quarter Ended
Nine Months Ended
September 30,
September 30,
Change
Change
2022
2021
$
%
2022
2021
$
%
(Dollars in thousands)
Salary and employee benefits
$
18,252
$
15,399
$
2,853
19
%
$
53,288
$
44,612
$
8,676
19
%
Occupancy
2,736
2,416
320
13
7,851
7,307
544
7
Professional fees
580
618
(38)
(6)
2,453
2,538
(85)
(3)
Deposit insurance premiums
903
927
(24)
(3)
2,355
2,995
(640)
(21)
Data processing
877
700
177
25
2,849
2,136
713
33
Advertising
796
596
200
34
2,247
1,334
913
68
Software and communication
1,222
999
223
22
3,689
3,098
591
19
Foreclosed assets, net
9
(35)
44
NM
(30)
680
(710)
NM
Other non-interest expense
3,076
2,416
660
27
10,617
7,967
2,650
33
Total non-interest expense
$
28,451
$
24,036
$
4,415
18
%
$
85,319
$
72,667
$
12,652
17
%
The changes in non-interest expense were driven primarily by the following:
Salary and Employee Benefits
- Salary and employee benefit costs increased for the three-
and nine-month periods ended September 30, 2022 compared to the
same periods
in
2021 primarily due to the impact of continued hiring for production
talent in a competitive environment, annual merit increases, and an increase related
to a change in the maximum
401(k) plan match from 3.5% in 2021 to 5.0% in 2022. For the nine-month period
ended September 30, 2022 compared to the same period in 2021, the increase also included
higher
incentive costs.
Occupancy
– The increase in occupancy costs was driven by the Company’s
expansion into Arizona in July 2021 and the addition of a second location in Dallas, Texas.
Deposit Insurance Premiums
- The FDIC uses a risk-based premium system to calculate the quarterly fee. Our premium costs decreased
for the three- and nine-month periods
ended September 30, 2022 compared to the same periods in 2021 as a result of
changes in asset quality. We currently anticipate deposit insurance premiums will increase over
the
next quarter because of expected loan growth and the common stock
repurchase program.
Data Processing
– The increase in data processing costs was driven primarily by increased costs associated with
the Company's digital client interface conversion.
59
Advertising
- The increase in advertising costs was driven by increased in-person events for the
three- and nine-month periods ended September 30, 2022 compared to
the same
periods in 2021 because of COVID-19 pandemic restrictions being lifted.
Software and Communication
- The increase was driven by our continued strategy to invest in technologies that allow us to
operate more efficiently, provide customers with a suite
of online tools,
and effectively analyze data to monitor operational trends. In addition, a portion of the increase
in costs was due to our growth. We currently anticipate our software
and communication costs to continue to increase in 2022 as we continue
adding and implementing new software products that improve our customers’ experience and our operating
efficiency.
Foreclosed Assets, net
– The decrease for the nine-month period ended September 30, 2022 compared to the same
period in 2021 was due to a $630 thousand write-down in value of
a commercial use facility foreclosed upon in 2020 during the three-month
period ended June 30, 2021.
Other Non-interest Expense
- Other non-interest expense increased for the three-
and nine-month periods ended September 30, 2022 compared to the same period
s
in 2021 due to
higher commercial card costs as a result of increased use by current
customers and customer growth, an increase in insured cash sweep (“ICS”) deposits which drove
related fees
higher,
and increased travel and meeting costs due to COVID-19 pandemic restrictions
being lifted. Additionally,
the nine-month period ended September 30, 2022 included $1.1
million in employee separation costs.
Income Taxes
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands)
Income tax expense
$
4,410
$
4,027
$
4,188
$
5,725
$
5,660
$
12,625
$
11,831
Income before income taxes
21,690
19,572
21,016
26,526
26,660
62,278
60,443
Effective tax rate
20
%
21
%
20
%
22
%
21
%
20
%
20
%
Our income tax expense differs from the amount that would be calculated
using the federal statutory tax rate, primarily from investments in tax advantaged
assets, including
BOLI and tax-exempt municipal securities;
state tax credits;
and permanent tax differences from equity-based compensation. Refer to
“Note 10: Income Tax” within the Notes to
Condensed Consolidated Financial Statements (unaudited) for a reconciliation
of the statutory rate to the Company’s
actual income tax expense.
During the three- and nine-month periods ended September 30,
2022, the Company’s effective tax rate benefited from permanent tax differences
related to tax-exempt interest.
During the three- and nine-month periods ended September 30,
2021, the Company benefited from permanent tax differences related to tax-exempt
interest and $1.8 million in BOLI
settlement benefits that reduced income taxes by $0.4 million and reduced
the effective tax rate by approximately 2%.
We currently anticipate the Company’s effective tax rate to remain within
the 20% to 22% range in the near term.
60
Analysis of Financial Condition
Securities Portfolio
The objective of the investment portfolio is to optimize earnings, manage
credit and interest rate risk, ensure adequate liquidity,
and meet pledging and regulatory capital requirements. The securities portfolio is also maintained
to serve as a contingent, on-balance
sheet source of liquidity. As of September 30, 2022, available-for-sale investments totaled $657 million, a decrease
of $89 million from
December 31, 2021.
The decline in the securities portfolio was driven by a $137 million decline
in the unrealized gain (loss) on available-for-sale
securities. The decline was partially offset by the purchase of $45 million in tax-exempt
municipal securities and $35 million in
mortgage-backed securities.
The Company currently anticipates continuing to grow the securities
portfolio in proportion to the growth
of the balance sheet. The Company anticipates additional unrealized losses as interest rates continue
to increase. For additional
information, see “Note 3: Securities” in the Notes to Condensed Consolidated
Financial Statements (unaudited).
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6162
Loan PortfolioQuarter Ended
Refer to “Note 4: Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (unaudited)
for additional informationSix Months Ended
regarding the Company’s loan portfolio. As of September 30, 2022, gross loans, net of unearned fees increased
$421 million or 10% from December 31, 2021
and was driven by the6/30/2023
following:3/31/2023
Commercial and Industrial Lines of Credit
- The $214 million or 35% increase in commercial lines of credit was driven by new
originations of $204 million.
Energy
- Our energy portfolio decreased $100 million or 36% from December
31, 2021 primarily due to $72 million in loans paid off and $79 million in net paydowns,
offset by
new originations of $64 million.
Commercial Real Estate
- The $122 million or 10% increase was driven by originations of $384 million of new
originations, offset by $268 million in loans paid off.
Construction and Land Development
- The $99 million or 17% increase was driven by new originations of $110 million.
Residential Real Estate
- The $34 million or 9% increase was driven by new originations of $62 million, offset by
$42 million loans paid off.
Multifamily Real Estate
- The $36 million or 15% increase was driven by new originations of $30 million.
The following table shows the contractual maturities of our gross loans and
sensitivity to interest rate changes:
As of September 30, 12/31/2022
Due in One Year or Less9/30/2022
Due in One Year through6/30/2022
Five Years6/30/2023
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
Total6/30/2022
(Dollars in thousands)
Commercial and industrialAdjusted Efficiency Ratio - FTE
(1)
Non-interest expense
$
25,88937,412
$
44,01438,092
$
268,27636,423
$
381,00928,451
$
53,49629,203
$
65,48375,504
$
19,66956,869
$Less: Acquisition costs
-(338)
$(1,477)
857,836(3,570)
Commercial and industrial(81)
lines of credit(239)
48,030(1,815)
307,620(239)
16,237Less: Core deposit intangible amortization
443,233(802)
10,414(822)
5,653(291)
-
-
831,187(1,624)
Energy-
8Less: Employee separation
40,172
9,448
129,227(1,300)
-
-
-
-(1,063)
178,855(1,300)
Commercial real estate(1,063)
34,313
193,897
427,932
348,355
181,577
199,339
-
14,925
1,400,338
Construction and land
development
22,434
54,461
73,783
442,656
24,426
16,448
1,637
38,196
674,041
Residential real estate
2,673
270
11,764
3,008
86,286
2,401
882
286,583
393,867
Multifamily real estate
21,416
70,755
44,286
127,202
4,967
7,169
-
-
275,795
Consumer
4,779
14,971
13,719
7,612
-
23,115
-
1,531
65,727
TotalAdjusted Non-interest expense (numerator)
$
159,54234,972
$
726,16035,793
$
865,44532,562
$
1,882,30228,370
$
361,16627,901
$
319,60870,765
$
22,18855,567
Net interest income
54,539
58,221
54,015
49,695
46,709
112,760
89,824
Tax equivalent interest income
(1)
750
797
818
820
808
1,547
1,583
Non-interest income
5,779
4,421
4,359
3,780
4,201
10,200
9,143
Total tax-equivalent income (denominator)
$
341,23561,068
$
4,677,64663,439
$
59,192
$
54,295
$
51,718
$
124,507
$
100,550
Efficiency Ratio (GAAP)
62.02
%
60.81
%
62.40
%
53.20
%
57.36
%
61.41
%
57.46
%
Adjusted Efficiency Ratio - FTE
(1)
57.27
%
56.42
%
55.01
%
52.25
%
53.95
%
56.84
%
55.26
%
(1)
Tax exempt income (tax-free municipal securities) is
calculated on a tax equivalent basis. The incremental
tax rate used is 21.0%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6263
Provision and Allowance forAnalysis of Financial Condition
Credit LossesInvestment Portfolio
The objective of our investment portfolio is to optimize earnings, manage
credit and interest rate risk, ensure adequate liquidity,
and meet pledging and regulatory capital requirements. Our investment
portfolio is also maintained to serve as a contingent, on-balance
sheet source of liquidity. As of June 30, 2023, available-for-sale investments totaled $744 million, an increase of $57
million from
December 31, 2022.
The increase in the investment portfolio was driven by the purchase of $107
million in SBA securities and $12 million in tax-
exempt municipal securities,
and a $4 million reduction in the unrealized loss on available-for-sale securities. The increase
was partially
offset by the sale of $55 million in tax-exempt municipal securities at a modest
gain and $9 million of paydowns and maturities in
mortgage-backed securities as we intentionally improved the liquidity
of the portfolio during the six-month period.
For additional
information, including information regarding other securities owned
by the Company, implementedsee “Note 2: Securities”
in the CECL model notes to
consolidated financial statements – unaudited.
The following table shows with respect to our portfolio of available-for-sale securities,
the estimated fair value, percent of the
portfolio of available-for-sale securities and weighted average yield of such securities
as of January the dates indicated:
As of June 30, 2023
As of December 31, 2022
Estimated
Fair Value
Percent of
portfolio
Weighted
Average
Yield
(1)
Estimated
Fair Value
Percent of
portfolio
Weighted
Average
Yield
(1)
Available-for-sale securities
(Dollars in thousands)
Mortgage-backed - GSE residential
$
272,933
37
%
3.29
%
$
172,309
25
%
2.39
%
Collateralized mortgage obligations - GSE
residential
9,516
1 2022.
2.43
10,886
2
2.36
State and political subdivisions
452,949
61
2.81
494,496
72
2.80
Corporate bonds
8,502
1
5.68
9,210
1
5.70
Total available-for-sale securities
$
743,900
100
%
3.01
%
$
686,901
100
%
2.74
%
(1)
Yields are calculated based on amortized cost using 30/360 day basis.
Tax-exempt securities are not tax effected.
64
Loan Portfolio
Refer to “Note 1: Nature of Operations and
Summary of Significant Accounting Policies” and “Note 4:
3: Loans and Allowance for Credit Losses” within the Notesnotes to Condensed Consolidated Financial Statements (unaudited)consolidated financial statements –
 
unaudited for detailsadditional information 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 decreaseportfolio. As of June 30, 2023, gross loans, net of unearned fees increased $424 million
 
(increase)or 8% from December 31, 2022.
The following table presents the required provisionbalance
and associated percentage change of each segment within our portfolio
as of the dates indicated:
As of June 30,
2023
As of December 31,
2022
December 31, 2022
vs.
June 30, 2023
% Change
(Dollars in thousands)
Commercial and industrial
$
2,057,912
$
1,974,932
4.2
%
Energy
232,863
173,218
34.4
Commercial real estate - owner-occupied
542,827
437,119
24.2
Commercial real estate - non-owner-occupied
2,480,282
2,314,600
7.2
Residential real estate
439,434
439,367
-
Consumer
43,281
33,493
29.2
Total
$
5,796,599
$
5,372,729
7.9
%
Our loan portfolio remains diversified with 45% of loans in commercial and industrial
and owner-occupied real estate and 42% of loans in commercial real estate. There
remains diversity within our loan portfolios with the highest commercial real
estate property type accounting for credit losses.17% of total commercial real estate exposure,
 
and the largest
industry segment in commercial and industrial being manufacturing at
11% of commercial and industrial exposure.
65
The following table shows the contractual maturities of our gross loans and
sensitivity to interest rate changes:
As of June 30, 2023
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
$
112,736
$
528,269
$
348,572
$
909,898
$
62,302
$
75,766
$
19,855
$
514
$
2,057,912
Energy
-
27,661
634
204,568
-
-
-
-
232,863
Commercial real estate -
owner-occupied
12,378
28,532
163,234
64,081
117,395
104,700
1,523
50,984
542,827
Commercial real estate - non-
owner-occupied
90,267
274,361
587,757
1,160,478
96,681
199,587
12,513
58,638
2,480,282
Residential real estate
7,381
4,316
21,434
8,758
69,479
21,973
4,333
301,760
439,434
Consumer
18,989
11,597
4,624
7,674
302
95
-
-
43,281
Total
$
241,751
$
874,736
$
1,126,255
$
2,355,457
$
346,159
$
402,121
$
38,224
$
411,896
$
5,796,599
Allowance for Credit Losses
The ACL at SeptemberJune 30, 20222023 represents our best estimate of the expected credit losses in the Company’s loan portfolio and off-balance sheet
 
commitments, measured over the
the contractual life of the underlying instrument.
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands)
Provision for credit losses
(1)
 
- loans
$
1,923
$
1,690
$
(316)
$
(5,000)
$
(10,000)
$
3,297
$
1,000
Provision for credit losses
(1)
 
- off-balance sheet
1,411
445
(309)
N/A
N/A
1,547
N/A
Allowance for credit losses
(2)
 
- loans
55,864
55,817
55,231
58,375
64,152
55,864
64,152
Allowance for credit losses
(2)
 
- off-balance sheet
6,731
5,320
4,875
N/A
N/A
6,731
N/A
Net charge-offs
$
1,876
$
1,104
$
1,081
$
777
$
1,341
$
4,061
$
12,143
(1)
Prior to March 31, 2022, this line represents the provision for loan losses
(2)
Prior to March 31, 2022, this line represents the allowance for loan
 
and lease losses
January 1, 2022, the adoption date, is presented below instead of December
 
31, 2021 for comparability purposes. The allocation in one portfolio segment does
 
not preclude its
availability to absorb losses in other segments. The table below presents the allocation of
 
the allowance for credit losses as of the dates indicated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6366
SeptemberThe table below presents the allocation of the allowance for credit losses as of the dates
indicated.
The allocation in one portfolio segment does not preclude its availability to
absorb losses in other segments.
June 30, 20222023
January 1,December 31, 2022
ACL
 
Amount
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
ACL
 
Amount
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
Loans
Off-
Balance
Sheet
Total
Loans
Off-
Balance
Sheet
Total
(Dollars in thousands)
Commercial and industrial
$
11,33728,929
$
97449
$
11,43429,378
1839
%
1836
%
$
10,13926,803
$
107319
$
10,24627,122
1739
%
2037
%
Commercial and industrial
lines of credit
12,057
-
12,057
19
18
8,866
44
8,910
14
14
Energy
4,8284,914
548496
5,3765,410
97
4
9,1904,396
265787
9,455
155,183
7
3
Commercial real estate -
16,455owner-occupied
6766,361
17,131205
286,566
319
18,9339
7115,214
19,644221
325,435
308
Construction and land8
developmentCommercial real estate -
4,587non-owner-occupied
5,32023,981
9,9076,496
1630,477
1441
3,66642
3,91421,880
7,5807,323
1229,203
1441
43
Residential real estate
3,2373,268
267
3,2393,335
4
8
3,333
35
3,368
5
8
3,046
5
3,051
5
8
Multifamily real estate
2,673
84
2,757
4
6
2,465
137
2,602
4
6
Consumer
690114
4-
694114
-
1
1149
3233
1152
324
1-
1
Total
$
55,86467,567
$
6,7317,713
$
62,59575,280
100
%
100
%
$
56,62861,775
$
5,1848,688
$
61,81270,463
100
%
100
%
Refer to “Note 4:3: Loans and Allowance for Credit Losses” within the Notesnotes to Condensed Consolidated Financial Statements (unaconsolidated financial statements –
 
udited)unaudited for a summary of the changes in the
ACL. Provided below is additional information regarding changes to
the ACL:
Impaired Loans:
For the three-
and nine-month periods
ended September 30, 2022, the impaired loan reserve decreased $0.1 million and
$5.6 million, respectively.
The decrease was primarily
due to a restructured commercial loan relationship in which addition
al collateral was obtained. For the nine-month period ended September
30, 2022, the change included a
commercial real estate loan with an improved collateral valuation that resulted
in a $2 million reduction in the required reserve, a $0.6 million decline related to a
commercial real
estate loan charged down and subsequently paid off, and two energy
loans that paid down their outstanding balance, resulting in a $1 million decrease to the required
reserve and one
energy loan that was charged down,
resulting in a $1 million decrease in the required reserve.
Charge-offs and Recoveries:Recoveries
Net charge-offs were $2$0.6 million and $4 $2.2
million for the three- and nine-month periods
ended September 30, 2022, respectively. For the three-month period
ended September
30, 2022 charge-offs included $0.6 million related to two collateral-dependent
energy loans and $2.0 million related to a collateral-dependent commercial and industrial
line of credit
loan. Recoveries
primarily included $0.8 million related to a commercial real estate loan charged-off
earlier in 2022.
For the nine-month period ended September 30, 2022, charge-offs
also included $2.0 million related to a collateral-dependent commercial
and industrial line of credit that
originated in 2018 and started to deteriorate at the end of 2021; a $1 million
charge-off related to an energy loan originated in 2016 that was significantly impacted by
lower oil
prices over the past few years;
a $0.8 million charge-off on a commercial real estate project that originated
in 2017 and started to deteriorate in 2020; $2.9 million related to two
collateral-dependent energy loans; $0.6 million related to a commercial and
industrial SBA loan originated in 2018; and $0.2 million related to a junior lien on a residential real estate
64
loan. Charge-offs were partially offset primarily by a $1.8 million recovery
on an energy loan that was charged-off in 2020, $1.6 million related to a commercial real estate loan
charged-off in 2020 and $1.7 million related to a commercial and industrial line
of credit charged-off in 2020.
During the three months ended September 30, 2021, charge
-offs primarily related to one commercial loan and one energy loan. The energy charge-off related to
the sale of
collateral from a borrower that filed for bankruptcy in a previous year. Approximately $2 million remained on the energy
loan at September 30, 2021. Recoveries totaled $0.2 million
for the three months ended September 30, 2021 primarily from a commercial loan
that was previously charged-off in 2020.
During the three months ended June 30, 2021, charge-offs primarily related
to a commercial and industrial borrower. The $3 million charged-off was greater than the reserved
balance in the Allowance for Loan and Lease Loss at December 31, 2020 resulting in a $2 million increase in the provision during
the three- and six-month periods ended June 30,
2021.
During the three-months ended March 31, 2021, charge-offs primarily 2023, respectively. For
 
the three-month period ended June 30, 2023,
charge-offs were primarily related to charge-offs of two commercial and industrial borrowers that were unable to support their debt obligations.
The $8 million charged-off was greater than the reserved balance in the allowance
 
for loan losses at December 31, 2020 resulting inindustrial loans.
Recoveries primarily included a $5 million increase inrecovery related to an energy loan. For the provision
 
during thesix-month
quarterperiod ended March 31, 2021.June 30, 2023, charge-offs also included a charge-off
of a collateral-dependent commercial and industrial loan. The below table provides the ratio of net charge-offs charge
-offs
(recoveries) to average
loans outstanding based on our loan categories for
the periods indicated:
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
 
March 31,
 
December 31,
 
September 30,
 
SeptemberJune 30,
 
September 30,2023
2023
2022
2022
2022
2021
2021
2022
2021
Commercial and industrial
-0.14
%
0.280.31
%
(0.27)(0.02)
%
0.270.48
%
0.04(0.11)
%
0.01Energy
%(0.23)
0.02-
%
Commercial and industrial lines of credit
1.10
(0.56)
0.76
0.04
0.62
0.36
3.12
Energy(0.46)
1.19
4.77
(1.02)
0.68
0.64
1.64
0.22
Commercial real estate
(0.21)
(0.45)
0.34
-
-
(0.12)
-
Construction and land development owner-occupied
-
-
-
-
-
Commercial real estate - non-owner-occupied
-
-
Residential real estate
-
0.21(0.15)
-(0.35)
(0.32)
-
0.07
-
MultifamilyResidential real estate
-
-
-
(0.06)-
(0.01)0.20
Consumer
0.04
-
(0.04)
-
-
Consumer
(0.05)
-
0.05
(0.01)
(0.03)
-
0.06
Total net charge-offs to average loans
0.04
%
0.12
%
(0.02)
%
0.16
%
0.10
%
0.10
%
0.07
%
0.13
%
0.12
%
0.37
%
Non-performing Assets and
Other Asset Quality Metrics
Non-performing assets include: (i) non-performing loans - includes
non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified
under
TDRs that are not performing in accordance with their modified terms; (ii) foreclosed
assets held for sale; (iii) repossessed assets; and (iv) impaired debt securities.
Non-performing assets decreased to $18 million as of September
30, 2022 due to an $11 million decrease
in non-accrual loans and a $2 million decrease in loans past due 90
days or more and still accruing interest. The decline in non-accrual loans was driven by $4 million
in loans returned to accruing status, $3 million in charge-offs on non-accrual
loans,
and $3 million in non-accrual loans that paid off. Improvements in
credit metrics continue to be driven by upgrades in COVID-19 impacted segments and
the energy portfolio.
Non-performing assets decreased to $31 million as of June 30, 2022
due to a $5 million decrease in non-accrual loans. The decline was driven by $4 million in charge-offs on
non-accrual loans. Improvements in credit metrics were driven by upgrades
in COVID-19 impacted segments and the energy portfolio.
65
Non-performing assets increased slightly to $36 million or 0.64% of total
assets as of March 31, 2022
primarily due to an $11 million, previously identified substandard
commercial and industrial line of credit. The increase was partially offset by a $7 million
decline in non-accrual energy loans due to $1 million in charge-offs, $3 million
in payoffs
and $3 million in loans placed back on accrual status. As of March 31, 2022, 25% of non-performing assets remained
in the energy sector.
During 2021, non-performing assets continued to decrease due primarily
to upgrades and pay offs in the commercial and industrial and energy portfolios. As of December 31,
2021, 49% of non-performing assets related to energy credits that were
significantly impacted by lower oil prices over previous few years.
Credit quality metrics were generally improved during the third quarter of 2022,
reflecting overall improvement from the prior quarter and significant improvement
over the
prior year.
The table below summarizes our non-performing assets and related ratios as of
the dates indicated:
For the Quarter Ended
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
(Dollars in thousands)
Non-accrual loans
$
16,923
$
27,698
$
33,071
$
31,432
$
48,147
Loans past due 90 days or more and still accruing
303
2,163
1,534
90
342
Total non-performing loans
17,226
29,861
34,605
31,522
48,489
Foreclosed assets held for sale
973
973
973
1,148
1,148
Total non-performing assets
$
18,199
$
30,834
$
35,578
$
32,670
$
49,637
ACL to total loans
1.19
%
1.23
%
1.27
%
1.37
%
1.51
%
ACL + ACL
on off-balance sheet to total loans
(1)
1.34
1.35
1.38
N/A
N/A
ACL to non-accrual loans
330
202
167
186
133
ACL to non-performing loans
324
187
160
185
132
Non-accrual loans to total loans
0.36
0.61
0.76
0.74
1.13
Non-performing loans to total loans
0.37
0.66
0.79
0.74
1.15
Non-performing assets to total assets
0.31
%
0.54
%
0.64
%
0.58
%
0.92
%
(1)
Includes the ACL on off-balance sheet credit exposure that resulted from CECL adoption on January 1, 2022.
Other asset quality metrics management reviews include loans past due
30 - 89 days and classified, gross loans. The Company defines classified loans as loans categorized
as
substandard - performing, substandard – non-performing,
doubtful, or loss. The definitions of substandard, doubtful and loss are provided in “Note 4: Loans and Allowance for
Credit Losses” in the Notes to Condensed Consolidated Financial Statements (unaudited).
The following table summarizes our loans past due 30 - 89 days, classified assets,
and
related ratios as of the dates indicated:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6667
September 30,Non-performing Assets and Other Asset Quality Metrics
Non-performing assets include: (i) non-performing loans, which
 
includes non-accrual loans, loans past due 90 days or more and still accruing
interest, and loans modified
prior to January 1, 2023 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.
Credit quality metrics remained strong during the second quarter of 2023.
Non-performing assets increased $2.1 million during the quarter to $13.3
million at June 30, 2023
primarily due to two commercial and industrial loans moving to non-accrual,
partially
offset by the sale of one other real estate owned property.
The non-performing assets to total
assets ratio decreased from 0.54% at June 30, 2022 to 0.19% at June 30, 2023. Annualized net charge-offs were 0.04% for
the quarter compared to 0.12% in the prior quarter and
0.10% in the prior year second quarter.
The Company continues to monitor the U.S. economic indicators, including
the inflation rate, commodity prices, interest rates, and potential supply chain disruptions
and the
impact they may have on the Company’s markets, clients, and prospects. The Company is monitoring
the impact of a rising interest rate environment on the commercial real estate
market and enterprise and leverage loans that is currently partially mitigated
by low debt-to-equity ratios.
As of June 30, 2023, the Company did not identify any systemic issues
within its loan portfolio that would materially affect the credit quality of the loan portfolio.
However, there could be some risk rating migration in certain sectors of the commercial
real estate portfolio in the future as many projects are faced with higher interest rates,
operating costs, and property taxes.
The table below summarizes our non-performing assets and related ratios as of
the dates indicated:
For the Quarter Ended
June 30,
 
March 31,
 
December 31,
 
September 30,
 
June 30,
2023
2023
2022
2022
2022
2021
2021Asset Quality
(Dollars in thousands)
Non-accrual loans
$
12,867
$
9,490
$
11,272
$
16,923
$
27,698
Loans Past Due Detailpast due 90 days or more and still accruing
30 433
868
750
303
2,163
Total non-performing loans
13,300
10,358
12,022
17,226
29,861
Foreclosed assets held for sale
- 59
855
1,130
973
973
Total non-performing assets
$
13,300
$
11,213
$
13,152
$
18,199
$
30,834
Loans 30-89 days past due
$
15,78513,333
$
15,7005,056
$
14,815
$
1,671
$
3,072
60 - 89 days past due
5,598
935
1,135
1,858
34,528
Total gross loans 30 - 89 days past due19,519
$
21,383
$
16,635
$Asset quality metrics (%)
15,950
$
3,529
$
37,600
Loans 30 - 89 days past due / grossNon-performing loans to total loans
0.460.23
%
0.18
%
0.22
%
0.37
%
0.370.66
%
0.08Non-performing assets to total assets
%0.19
0.890.16
%0.20
Classified Loans0.31
Substandard - performing0.54
$
55,038
$
52,759
$
40,257
$
47,275
$
75,999
Substandard - non-performing
15,135
25,530
30,619
28,879
45,063
Doubtful
1,788
2,144
2,451
2,554
3,084
Loss
-
-
-
-
-
Total classified, grossACL to total loans
71,9611.17
80,4331.15
73,3271.15
78,7081.19
124,1461.23
Foreclosed assets held for saleACL + RUC to total loans
973(1)
9731.30
9731.30
1,1481.31
1,1481.34
Total classified assets1.35
$ACL to non-performing loans
72,934508
$629
81,406514
$324
74,300
$
79,856
$
125,294187
Classified loans / (total capital + ACL)
9.7
9.4
10.1
11.3
%
12.1
%
10.8
%
10.8
%
17.3
%
Classified loans / (total capital + ACL +
ACL on off-
balance sheet) RUC)
(1)
9.6
9.3
10.0
11.2
12.0
10.7
N/A
N/A
Classified assets / (total capital + ACL)
11.5
%
12.3
%
11.0
%
11.0
%
17.5
%
(1)
Includes the ACL onaccrual for off-balance sheet credit exposure that resultedrisk from CECL adoption on January 1, 2022.
The increase in loans past due between 30 and 89 days as of September 30,
2022 was primarily driven by net increases in commercial real estate loans .
Loans past due
between 30 and 89 days to gross loans increased to 0.46% compared to the prior
quarter. Classified loans decreased 11% during the third quarter primarily due
to lower non-accrual
loans in the commercial and industrial and commercial real estate portfolios.
The increase in loans past due between 30 and 89 days as of June 30, 2022
was primarily driven by the 4% loan growth from the previous quarter. Loans past due between
30
and 89 days to gross loans remained at 0.37% compared to the prior quarter.
Classified loans increased slightly during the second quarter primarily
due to downgrades in the
commercial and industrial portfolio but remained in an acceptable range
at 12.1% of total capital plus the allowance for credit losses.
The increase in loans past due between 30 and 89 days as of March 31, 2022
was primarily driven by an $11 million commercial and industrial line of credit. In
the first
quarter of 2022, we experienced improvement in our classified loan totals as classified
loans decreased 7% during the quarter to $73 million. Classified totals in
the energy portfolio
decreased 24% to $16 million compared to the prior quarter and represent
ed 22% of total classified loans.unfunded commitments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6768
Deposits and Other Borrowings
At June 30, 2023, our deposits totaled $6.1 billion, an increase of $449 million or
8% from December 31, 2022. The increase included an $893 million increase in time deposits
and $28 million in money market, NOW and savings deposits, partially offset
by a decrease of $472 million in non-interest-bearing deposits. Approximately one
-third of the time
deposit increase was from new client money and shifts from other deposit categories
with the remainder representing an increase in wholesale funding. The decrease
in non-interest-
bearing deposits was primarily due to elevated deposits at year-end
that were deployed by clients late in the first quarter of 2023.
The following table sets forth the maturity of time deposits as of September
June 30, 2022:2023:
As of SeptemberJune 30, 20222023
Three Months
 
or Less
Three to Six Months
Six to Twelve
Months
After Twelve Months
Total
(Dollars in thousands)
Time deposits in excess of FDIC insurance limit
$
35,18828,183
$
22,27142,042
$
27,877333,875
$
159,67521,740
$
245,011425,840
Time deposits below FDIC insurance limit
176,316409,149
100,125357,659
125,601539,083
103,118106,724
505,1601,412,615
Total
$
211,504437,332
$
122,396399,701
$
153,478872,958
$
262,793128,464
$
750,171
At September 30, 2022, our deposits totaled approximately $5 billion, an
increase of $304 million or 6% from December 31, 2021. The increase
included $126 million in time
deposits and $227 million in money market, NOW and savings deposits
,
partially offset by a decrease of $49 million in non-interest-bearing deposits
.
The increase in time deposits was
the result of a $179 million net increase in wholesale funding to support
current and expected loan growth through the end of 2022, partially offset by
a decrease in customer deposits.
The increase in money market, NOW,
and savings deposits was driven primarily by increases in ICS deposits and both
business and personal money market deposits.1,838,455
Other borrowings include Federal Home Loan Bank (“FHLB”)FHLB advances, a line of credit, SBA loan secured
borrowings, and our
trust preferred security. At September
 
At June 30, 2022,2023, other borrowings totaled $206 $277
million, a $31
$23 million, or 13% decrease9% increase from December 31, 2021.2022. During the nine-month
 
the six-month period ended SeptemberJune 30, 2022, $21.52023, $31.0 million of FHLB advances matured $12.5
 
million of net FHLB
advancesand were paid off and $65 million of advances converted
into a
drawdown on the FHLB line of credit. credit, an additional $10.0 million matured
and $6.5 million of net FHLB advances were paid off.
The Company utilized the
conversion of $65an additional $61.2 million of FHLB advances to
net draws on the FHLB line of credit and an additional $2.7the conversion of $31.0 million of net withdrawalsFHLB advances to
the FHLB line of credit to support
loan growth and changes in deposits, resulting
 
resulting in $67.7a
balance of $167.2 million outstanding on the FHLB line of credit atas of
SeptemberJune 30, 2022.2023.
As of SeptemberJune 30, 2022,2023, the Company’s
top 25 customer relationships represented approximately 20% or $1.2 billion of
total deposits, $0.5 billion of which are insured cash sweep
(“ICS”) deposits. The Company believes it has sufficient funding
sources, including on-balance sheet liquid assets and wholesale deposit options,
so that an immediate reduction in
these deposit balances would not be expected to have a material, detrimental
effect on the Company’s
financial position or operations.
As of June 30, 2023, the Company had approximately $2.4$2.3 billion of uninsured
 
of uninsured deposits, which is an estimated amount based on the same methodologies and assumptions
 
and assumptionsused
used for the Bank’s regulatory requirements.
 
Excluding pass-thru accounts where clients have deposit insurance at the
correspondent financial institution, our uninsured deposits are $2.0
billion, or 32% of total deposits as of June 30, 2023. The average client account
balance as of June 30, 2023 is less than $250 thousand for both individual accounts
and business
accounts in total after excluding pass-through and ICS deposits. We
have geographic and industry diversity within our deposit base as the majority
of our deposits are located in our
footprint states of Kansas, Oklahoma, Texas,
Missouri,
and Colorado. The Company believes that its current capital ratios and liquidity
are sufficient
to mitigate the risks of uninsured
deposits.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6869
Liquidity and Capital Resources
Contractual Obligations and Off-Balance Sheet
Arrangements
The Company is subject to contractual obligations made in the ordinary
 
course of business. The obligations include deposit
liabilities, other borrowed funds, and operating leases. Refer to “Note 6:7: Time
 
Deposits and Other Borrowings” and “Note 4: Leases”
within the Notesnotes to
Condensed Consolidated Financial Statements (unaudited) consolidated financial statements – unaudited for
 
a listing ofinformation regarding the Company’s significant contractual
 
contractual cash obligations. Refer
to “Note 14: Leases” within the Notes to Condensed Consolidated Financial Statements
(unaudited) for the Company’sobligations and contractual
obligations to third parties on lease obligations.obligations,
respectively.
 
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
 
represent the Company’s future
cash requirements.
However, a portion
of these commitments may expire without being drawn upon. Refer to
 
“Note 12:15: Commitments and Credit Risk” within the Notesnotes to
Condensed Consolidated Financial Statements (unaudited)consolidated financial statements – unaudited for
a listing of the Company’s off
 
-balanceoff-balance sheet arrangements.
The Company’s short-term and long
 
-term contractual obligations, including off-balance
 
sheet obligations, may be satisfied
through the Company’s on-balance
 
sheet and off-balance sheet liquidity discussed below.
Liquidity
We manage our liquidity based upon factors that include the level and quality of capital
and our overall financial condition, the
trend and volume of problem assets, our balance sheet risk exposure, the level
of deposits as a percentage of total loans, the amount of
non-deposit funding used to fund assets, the availability of unused funding sources
and off-balance sheet obligations, the availability of
assets to be readily converted into cash without undue loss, the amount of
cash and liquid securities we hold, and other factors. The
Company’s liquidity strategy is to maintain adequate, but not excessive, liquidity
 
liquidity to meet the daily cash flow needs of clients while
while attempting to achieve adequate earnings for stockholders. The liquidity
position is monitored
continuously by management. The
Company's short-term and long-term liquidity requirements are primarily
 
met through cash flow from operations, redeployment of
prepaying and maturing balances in our loan portfolio and security portfolio,
 
increases in client deposits and wholesale deposits.
Liquidity resources can be derived from two sources: (i) on-balance
 
sheet liquidity resources, which represent funds currently on the
balance sheetstatement of financial condition and (ii) off-balance sheet liquidity resources,
which represent
funds available from third-party sources.
The Company’s
on-balance sheet and off-balance sheet liquidity resources
consisted of
the following as of the dates indicated:
SeptemberJune 30, 20222023
December 31, 20212022
(Dollars in thousands)
Total on-balance sheet liquidity
$
964,9521,086,397
$
1,224,253986,482
Total off-balance sheet liquidity
779,9901,492,762
732,748770,165
Total liquidity
$
1,744,9422,579,159
$
1,957,0011,756,647
On-balance sheet liquidity as a percent of assets
1715
%
2215
%
Total liquidity as a percent of assets
3036
%
3527
%
For the nine-monthssix-months ended SeptemberJune 30, 2022,2023, the Company’s cash
and cash equivalents declined $174
increased $42 million from December 31,
31, 2021 2022
to $309$342 million, representing 5% of total assets. During the nine-month
six-month period ended September June
30, 2022,2023, the Company
increased the AFS
available-for-sale securities portfolio on an amortized cost basis by $48$53 million, net
of paydowns, maturities,
 
maturities, and amortization, toamortization. As of
improveJune 30, 2023, the yield Company had $282 million in securities that could be pledged
and $169 million that could be sold at a net gain based
on interest-earning assets.market conditions at the time. In addition, the Company increased funded
 
increased loan fundingloans by $425$427 million, net of payoffs and charge-offs
charge-offs during the nine-monthsix-month period ended SeptemberJune 30, 2022
2023 that reduced cash and
cash equivalents.
 
The Company’s time deposits increased by $126$893 million primarily from
 
wholesale funding. Non-interest-bearing deposits,
funding, while savings and money market
deposits increased $178by $28 million. Non-interest-bearing deposits decreased
$472 million driven primarilyas elevated year-end balances were deployed
by clients in the first quarter in addition to clients migrating into savings
 
by increases in ICS deposits and both business and
personal money market deposits. accounts.
Other borrowings decreased $31$21
million during the nine-monthsix-month period ended SeptemberJune 30, 2022,2023,
 
as
net amounts of $34 million of FHLB advances matured or were paidlargely related to a reduction in Federal Funds purchased.
 
off and a net $3 million was drawn down on the FHLB line of
credit.
The Company continued its repurchase program, purchasing $31
million of common stock during the first nine months of 2022.
As of September 30, 2022, $21 million remains available for repurchase
under our share repurchase program. We expect to continue to
repurchase shares under our share repurchase program, but the amount and timing
of such repurchases will be dependent on a number of
 
 
 
6970
The Company did not purchase any common stock during the first six months of
2023. As of June 30, 2023, $16 million remains
available for repurchase under our share repurchase program. The amount and
timing of such future share repurchases will be dependent
on a number of factors, including the price of our common stock, overall capital levels
and other cash flow needs. There is no assurance that
that we will repurchase up to the full
amount remaining under our program.
 
A dividend of $103 thousand related to the Series A
Non-cumulative Perpetual Preferred Stock was declared and paid by the
Company during the three-
and six-months
ended June, 2023. In July 2023, the Board of Directors declared a quarterly dividend on
Series A Non-Cumulative Perpetual Preferred Stock in the amount of $20.00 per share to be payable on September 15, 2023 to
shareholders of record as of August 31, 2023.
The Company believes that its current on and off-balance sheet liquidity
will be sufficient to meet anticipated
cash requirements
for the next 12 months
and thereafter. The Company believes that isit has several on and off-balance
sheet options
to address any resulting reductions in
cash and
cash equivalents in order to maintain appropriate liquidity.
In addition, we expect the acquisition of Canyon will modestly
improve our liquidity position and loan-to-deposit ratio post-merger.
Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements
 
administered by the federal banking agencies.
The regulatory capital requirements involve quantitative measures of
 
the Company’s assets, liabilities, select off-balance sheet items and
equity. Failure to meet minimum capital requirements can initiate certain
 
mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
 
Company’s consolidated financial statements. Refer to “Note 8:10:
Regulatory Matters” in the Notesnotes to Condensed Consolidated Financial Statementsconsolidated financial statements – unaudited
 
(unaudited) for additional information. Management
believes that
as of SeptemberJune 30, 2022,2023, the Company and the Bank met all capital adequacy requirements
 
requirements to which they are subject.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
 
with GAAP and with general practices within the financial
services industry. Application of these principles requires management to make complex and subjective estimates and
 
assumptions that
affect the amounts reported in the financial statements and accompanying
 
notes. The Company bases estimates on historical experience
and on various other assumptions that it believes
 
to be reasonable under current circumstances. These assumptions form the basis for
management judgments about the carrying values of assets and liabilities that are
 
are not readily available from independent, objective
sources. The Company evaluates estimates on an ongoing
basis. Use of alternative assumptions
may have resulted in significantly
different estimates. Actual results may differ from these estimates.
A discussion of these policies can be found in the section captioned “Critical Accounting Policies and Estimates” in
Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 20212022 Form
 
10-K.
 
There have
On January 1, 2022, the Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of
Credit Losses on Financial Instruments. Refer to “Note 1: Nature of
Operations and Summary of Significant Accounting Policies” and
“Note 4: Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (unaudited)
for
information regarding the Company’s ACL implementation and the ACL process. Determining the appropriateness of the ACL
is
complex and requires judgment by management about the effect of matters that
are inherently uncertain. These critical estimates include
significant use of the Company’s historical data and complex methods to interpret
them.
It is difficult to estimate how potential changes in any one input might affect the
overall ACL because inputs may change at
different rates and may not be consistent across the loan segments. In addition,
changes in inputs may be directionally
inconsistent such
that one factor may offset deterioration in others. The Company identified the following
estimates and assumptions as the main drivers
in the required ACL for loans and the reserve for off-balance sheet commitments:
◾
Fully exhausted loan pool
– The historical loss factor is calculated by identifying a group of loans at a point in time (a
“cohort”) and tracking the cohort’s charge-offs, net of recoveries, over
a 10-year period (known as the estimated
economic life). A charge-off rate for each cohort is calculated based on charge-offs, net of recoveries over the initial loan
balance. The charge-off rate for a specific cohort is not included in the weighted
average historical loss rate until “fully
exhausted.”
A cohort balance declines due to modifications, renewals, and paydowns. The Company requires the remaining cohort
balance to be less than 15% of its original cohort balance before being included
in the historical loss factor. The 15%
70
represents the exhaustion rate. Changes to the assumed exhaustion rate could
increase or decrease the historical loss rates
based on the timing of charge-offs, net of recoveries.
◾
Forward looking factors
– The Company uses the Federal Reserve Bank’s unemployment rate forecast to adjust
expected losses based on an economic outlook. The Company’s current methodology
increases the ACL one basis point
for each 1% increase in the average unemployment rate forecast.
◾
Changes in the assumed utilization rate of off-balance sheet commitments
– The Company uses a 12-month
historical utilization rate for all loan segments, excluding construction and
development loans that use a higher
utilization rate. An ACL
on off-balance sheet commitments is required if the end of period utilization
rate is less than the
12-month historical utilization rate.
Besides the ACL methodology mentioned above, there have been no additional changes in the Company’s application of critical
accounting policies
and estimates since December 31, 2021.2022.
 
Recent Accounting Pronouncements
Refer to “Note 1: Nature of Operations and Summary of Significant Accounting Policies” included in the Notesnotes to Condensedconsolidated
Consolidated Financial Statements (unaudited)financial statements – unaudited included elsewhere in this Form
10-Q.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
71
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Interest Rate Risk
A primary component of market risk is interest rate volatility. Interest rate risk management is a key element of the Company’s
balance sheetstatement of financial condition management. Interest rate risk is the risk that net interest margins
 
will erode over time due to changing
market conditions.
Many factors can cause margins to erode: (i) lower loan demand;
(ii) increased
competition for funds; (iii) weak
pricing policies; (iv)
balance sheet statement of financial condition mismatches; and (v)
changing liquidity demands. The objective
is to maximize
income while minimizing interest rate risk.
The Company manages its sensitivity position using
its interest rate risk policy. The
management
of interest rate risk is a three-step
process and involves: (i)
measuring the interest rate risk position; (ii) policy constraints;
constraints; and (iii) strategic review and implementation.
Our exposure to interest rate risk is managed by the Asset/Liability Committee (“ALCO”). The ALCO uses a combination of
three systems to measure the balance sheet’sstatement of financial condition’s interest rate
risk position. The three systems in
combination are expected
to provide a better
overall result than a single system alone. The three systems include:
(i) gap reports; (ii)
earnings simulation; and (iii)
economic value of
equity. The ALCO’s primary tools to change the interest rate risk position are: (i) investment portfolio duration;
(ii)
deposit and
borrowing mix; and (iii) on balanceon-balance sheet derivatives.
The ALCO evaluates interest rate risk using a rate shock method and rate ramp method. In a rate shock analysis, rates change
immediately,
 
and the change is sustained over the time horizon. In a rate ramp analysis, rate changes
 
occur gradually over time.
Management reviews and utilizes both methods in managing interest rate risk;
however, both methods represent a risk indicator, not a
forecast. 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
SeptemberJune 30, 20222023
SeptemberJune 30, 20212022
Change in Interest
Rate (Basis Points)
Percent change in net
interest income
Percent change in fair
value of equity
Percent change in net
interest income
Percent change in fair
value of equity
+300
6.13.5
%
(11.1)(18.1)
%
6.4
%
(8.9)(9.2)
%
+200
2.2
(12.3)
4.1
(7.3)
3.6
(5.7)(5.8)
+100
2.00.9
(3.2)(5.9)
1.12.0
(3.0)
Base
-
%
-
%
-
%
-
%
-100
(1.9)(1.4)
3.25.9
NA(2.7)
(1)
NA
(1)2.7
-200
(5.7)(2.5)
5.712.4
NA
(1)
NA
(1)
-300
(10.1)(4.5)
7.119.4
NA
(1)
NA
(1)
(1)
The Company decided to excludeexcluded a portion of the down rate environment from its analysis due to the already low interest rate environment.
Hypothetical Change in Interest Rate - Rate Ramp
SeptemberJune 30, 20222023
SeptemberJune 30, 20212022
Change in Interest Rate
 
(Basis Points)
Percent change in net interest
income
Percent change in net interest
income
+300
2.90.2
%
2.53.1
%
+200
1.9-
1.22.0
+100
1.0(0.1)
0.21.0
Base
-
%
-
%
-100
(0.9)(0.4)
NA
(1)(1.1)
-200
(2.1)(0.4)
NA
(1)
-300
(4.1)(0.7)
NA
(1)
(1)
 
The Company decided to excludeexcluded a portion of the down rate environment from its analysis due to the already low interest rate environment.
 
72
The Company’s position is slightly asset sensitive as of SeptemberJune 30, 2022.2023, which
is less sensitive as compared to both June 30, 2022
and December 31, 2022 due to deposit mix changes with demand deposits as the main
driver. Compared to December 31, 2022, the
Company’s position is slightly less asset sensitive due to the reduction in demand
deposits. The hypothetical positiveaggregate beta assumption utilized as of
June 30, 2023 was approximately 60% which is unchanged from our
 
changeprevious assumption. Other key assumptions updated year-to-date
2023 include updated deposit decay rates, new business spreads and
updating market yield curves. Other assumptions included in net interestthe
income as of September 30, 2022 in an up 100 basis point shock is mainly duemodel that are periodically updated include loan prepayments and call provisions
 
to approximately $3.6within investment and debt holdings.
The Company is
monitoring interest rate sensitivity closely as $4.0 billion, or 69%, of
loans and $0.4 billion, or 32%, of investments mature or reprice
within the twelve-month period following June 30, 2023, including $2.7
billion and $0.4 billion, respectively,
that repriced in the first
month of the third quarter. $5.3
 
billion of the Company’s earning
assets repricing or maturing within the first year, with $2.8 billion of that being
in the first month. In addition, $624 million of the
Company’s time deposits and other borrowingsinterest-bearing liabilities mature or reprice
within that same 12-month period. Assuming over the same balance sheet
mix, the Company currently anticipates an increase to net interest incometwelve-month
 
in all upward rate rampperiod. As of June
30, 2023 and shock scenarios. In down rateDecember 31, 2022, the investment portfolio duration
scenarios, income is predicted to decrease.was approximately 5.3 years. The Company is monitoring longer termreviewing additional
options to manage the statement of financial condition sensitivity based
 
on the interest rate expectationsenvironment and is evaluating optionsanticipated composition of
to reduceassets and liabilities in the impact of any downward rate adjustments, including
the use of hedges.next twelve months and beyond.
The models the Company uses include assumptions regarding interest rates
 
while balances
remain unchanged. These assumptions
are inherently uncertain and, as a result, the model cannot precisely estimate net interest income
 
or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and
 
and frequency
of interest rate changes as well as changes in market conditions, customer behavior
 
and management strategies, among other factors.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive
 
Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company’s disclosure controls and procedures
 
(as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (“Exchange Act”)) as of SeptemberJune 30, 2022.2023. Based on that evaluation, the Company’s Chief Executive Officer and
and Chief Financial
Officer concluded that the Company’s disclosure controls
and procedures were effective
as of SeptemberJune 30, 2022.2023.
 
Changes in Internal Control over Financial Reporting
The Company implemented internal controls to ensure the Company adequately
calculated changes due to, and properly assessed
the impact of, the accounting standard updates related to the adoption of ASC 326 on January 1, 2022. There were no significant
changes to ourOur internal control over financial reporting duecontinues to the adoption ofbe updated
 
the new standard.
as necessary to accommodate modifications to our business
Noprocesses and accounting procedures. There has been no change in the Company’s our
internal control over financial reporting (as such term
is defined
in Rule 13a-15(f) under the
Exchange Act) that occurred during the thirdsecond quarter of 20222023
that has materially affected, or is reasonably likely to
materially
affect, the
Company’sour internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, we are named or threatened to be named
 
as a defendant in various lawsuits. Management,
following consultation with legal counsel, does not expect the ultimate disposition
 
of any or a combination of these matters to have a
material adverse effect on our business, financial condition, results of operations,
 
cash flows or growth prospects. However, given the
nature, scope, and complexity of the extensive legal and regulatory landscape
 
landscape applicable to our business (including laws and regulations
governing consumer protection, fair lending, fair labor, privacy, information
 
security and anti-money laundering and anti-terrorism
laws), we, like all banking organizations, are subject to heightened legal
 
and regulatory compliance and litigation risk.
 
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully
 
consider the factors discussed in Part I, "Item 1A.
Risk Factors" in our 20212022 Form 10-K, which could materially affect
 
our business, financial condition,
 
or results of operations in future
periods.
 
There were no material changes from the risk factors disclosed in the 20212022 Form 10-K.
 
 
 
73
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
(a)
None.Not applicable.
(b)
Not applicable.
(c)
Share Repurchase Program
The following table summarizes our repurchases of our common shares
for the three-months ended September 30, 2022:
Calendar Month
Total Number of
Shares
Repurchased
Average Price
Paid per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
(1)
Approximate Dollar Value of Shares that
may yet be Purchased as Part of
Publicly Announced Plans or
Programs
(1)
July 1 - 31
243,254
$
13.26
243,254
$
28,273,238
August 1 - 31
304,668
$
14.16
304,668
$
23,950,841
September 1 - 30
246,535
$
13.28
246,535
$
20,672,141
Total
794,457
$
13.61
794,457
(1)
On October 18, 2021,May 10, 2022, the Company announced that its Board of Directors approved
 
a share repurchase program under which the
Company could repurchase up to $30 million of its common stock. This program was completed
during the third quarter of 2022.
On May 10, 2022, the Company announced that its Board of Directors approved
a second share repurchase program under which
the Company may repurchase up to $30 million of its common stock. No shares
were repurchased during the three-months ended June
30, 2023.
As of SeptemberJune 30, 2022, $212023, $16 million
remains available for
repurchase under
this share repurchase program. Repurchases
under
the program may be made in the open market or privately negotiated
negotiated transactions in compliance with SEC Rule 10b-18,
subject to market conditions,
applicable legal requirements,
 
and other
relevant factors. The program does not obligate the Company
to acquire any amount
of common stock and may be suspended at any
time at the
Company's discretion. No time limit has been set
for completion of the program.
ITEM 5. OTHER INFORMATION
(a)
None
(b)
None
(c)
Trading Arrangements
During the three months ended June 30, 2023, no director or officer (as defined
in Rule 16a-1(f) under the Exchange Act) of the
Company
adopted
or
terminated
a “Rule 10b5-1 trading arrangement” or “
non-Rule 10b5-1
trading
arrangement
,” as each term is
defined in Item 408 of Regulation S-K.
 
 
 
74
ITEM 6. EXHIBITS
 
Exhibit
Number
Exhibit Description
**
101.INS*
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags
are embedded within the Inline XBRL document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (formation in Inline XBRL and contained in Exhibit 101)
*
 
Filed Herewith
**
 
Furnished Herewith
 
†
 
Indicates a management contract or compensatory plan arrangement
 
 
75
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
 
its
behalf by the undersigned thereunto duly authorized.
CrossFirst Bankshares, Inc.
November 8, 2022Date:
August 4, 2023
/s/ Benjamin R. Clouse
 
Benjamin R. Clouse
 
Chief Financial Officer
 
(Principal Financial OfficerDuly authorized officer and Principal Accounting Officer)principal financial officer)