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
September 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
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),
 
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
 
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
 
for such shorter period that the registrant
was required to submit such files).
 
Yes
 
☒
 
No
 
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
 
filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated
 
“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
 
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-212b
-2 of the Exchange Act). Yes
 
☐
 
No
 
☒
As of November 7, 2022,October 28, 2023, the registrant had
48,617,78049,296,927
 
shares of common stock, par value $0.01, outstanding.
 
2
CrossFirst Bankshares, Inc.CROSSFIRST BANKSHARES, INC.
Form 10-Q for the Quarter Ended September 30, 20222023
Index
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Forward-Looking Information
4
5
6
7
9
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
6953
7172
7273
Part II. Other Information
7273
7273
7374
74
7475
7576
 
3
Forward-Looking Information
All statements contained in this quarterly report on Form 10-Q that do not directly and exclusively
 
and exclusively relate to historical facts
constitute forward-looking statements. These statements are often, but not always, made through the
 
through the use of words or phrases such as
“may,” “might,” “could,” “predict,” “potential,
“potential,” “believe,” “expect,
“expect,” “continue,”
 
“will,” “anticipate,
“anticipate,” “seek,
“seek,” “estimate,” “intend,
“intend,”
“plan,” “projection,” “goal,
“goal,” “target,” “outlook,” “aim,
“aim,” “would,” “annualized,” “position”
 
“annualized” and “outlook,”
or the negative of these words
or other
comparable words or phrases of a future or forward-looking nature. For example,
 
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 in this Form 10-Q
 
below to “we,” “our,” “us,
“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, 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 not guaranteesa guarantee
of future
performance and are subject to risks, assumptions, estimates and uncertainties that are
 
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
 
execution,fluctuations; our ability to effectively execute our growth
strategy and manage our growth, including identifying and consummating suitable
expansion,mergers and acquisitions, entering new lines of
business or offering new or enhanced services products or productproducts; our ability to successfully
 
enhancements, phase-out of the London Interbank Offered Rate
(LIBOR) and uncertainty relating to alternative reference rates, fluctuation
ofintegrate Canyon; fluctuations in fair value of our investment securities,
investments due to factors outside of our control; our ability to successfully
manage credit qualityrisk and the sufficiency of our allowance;
risk,geographic concentration of our markets; economic impact on our commercial real estate
and commercial-based loan portfolios,
including declines in commercial and residential real estate values, hiring and retention of keyvalues; an increase in
 
personnel,non-performing assets; our ability to attract, hire and
retain key personnel; maintaining and increasing 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,
 
demand for loans inproviders; the Company’s market areas, changes ineffectiveness of our risk management
framework; accounting and tax principles, estimates made on income taxes,estimates; our ability to maintain effective internal control
over financial reporting; our ability to keep pace with
with technological change, cybersecuritychanges; cyber incidents
or other failures, disruptions or security breaches,breaches; employee
error, fraud committed against the
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 our third-party services
providers, reputational risks, intellectual property infringement,litigation; environmental liability; risk exposure
 
legislativefrom transactions with financial
counterparties; severe weather, natural disasters, pandemics;
acts of war or terrorism 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 regulatory changes,assessments, consumer protection laws and privacy laws; volatility in
our stock price; or 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. synergies.
 
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 or
 
or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes
in our business,
results of operations or financial condition over
time. Given these risks and uncertainties, readers are cautioned not to place undue reliance
 
on such forward-looking statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 - UNAUDITED
Three Months Ended
Nine Months EndedConsolidated Statements of Financial Condition – Unaudited
September 30, 2023
September 30,
December 31, 2022
2021
2022
2021
(Dollars in thousands except per share data)thousands)
Interest IncomeAssets
Loans, including feesCash and cash equivalents
$
59,211233,191
$
42,664
$
149,266
$
130,268300,138
Available-for-sale securities - taxable
1,119345,708
803
3,250
2,423198,808
Available-for-sale securities - tax-exempt
3,905404,779
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
5805,945,753
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
56,62871,556
58,375
(1,747)61,775
Loans, net of the allowance for credit
losses on loans
4,199,5855,874,197
4,197,8385,310,954
1,747Premises and equipment, net
Deferred tax asset70,245
65,984
Restricted equity securities
4,396
12,536
Interest receivable
35,814
29,507
Foreclosed assets held for sale
-
1,130
Goodwill and other intangible assets, net
32,293
29,081
Bank-owned life insurance
70,367
69,101
Other
108,489
95,754
Total assets
$
13,6477,179,479
$
14,4746,601,086
Liabilities and stockholders’
equity
Deposits
Non-interest-bearing
$
(827)
Liabilities
Allowance for credit losses on off-balance
sheet exposures1,028,974
$
5,1841,400,260
$Savings, NOW and money market
-3,558,994
$3,305,481
5,184Time
Stockholders' equity1,743,653
Retained earnings945,567
$Total deposits
144,4896,331,621
$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
88,531
218,111
Other borrowings
18,059
35,457
Interest payable and other liabilities
98,217
87,611
Total liabilities
6,536,428
5,992,487
Stockholders’
 
yield curve as theequity
incremental borrowing rate.Preferred stock, $
The Company elected several practical expedients that are listed below:
Practical Expedient Elected
Impact to Lease Accounting Implementation
An entity need not reassess whether any expired
or existing contracts are or contain leases.
The Company was not required to re-evaluate previously identified leases,
including embedded leases, that existed as of the adoption date.
An entity need not reassess the lease classification
for an expired or existing leases.
The Company was not required to re-classify previously identified operating
leases that existed as of the adoption date. The Company did not have any
capital leases as of December 31, 2021.
An entity need not reassess initial direct costs for
any existing leases.
The Company was not required to review previously established lease
agreements as of the adoption date for initial direct costs. Initial direct costs
increase the right-of-use asset and do not impact the lease liability.
An entity may combine lease and non-lease
components.
If not elected, the Company would be required to allocate the total
consideration in a lease contract to lease and non-lease components based
on
their relative standalone price. The election results in higher right-of-use
assets and lease liabilities.
Short-term lease exemption.
The Company is not required to record a right-of-use asset and lease liability
for a lease whose term is 12 months or less and does not include a purchase
option that the lessee is reasonably certain to exercise.
0.01
 
par value:
Authorized -
Impact of Adoption15,000
 
– 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
$
shares, issued -
$
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
Background7,750
 
– 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, 20222023 and
no
shares at 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
-
-
Common stock, $
0.01
par value:
Authorized -
4,535
325
4
Total temporarily
impaired securities
$
531,613
$
72,759
409
$
94,345
$
35,775
54
$
625,958
$
108,534
463
200,000,000
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-backedshares, issued -
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
53,285,789
and
Based on the Company’s evaluation53,036,613
shares at September 30, 2023 and December 31, 2022, under
the new impairment model, an allowance for credit losses has
norespectively
t been recorded533
no530
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.Treasury stock, at cost:
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
18
The following tables show the gross gains and losses on securities that matured
or were sold:
3,990,753
 
and
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 $
24,588,398
 
million investment in a Community Reinvestment Act (“CRA”) mutual fund and $
2
million in
three private equity funds. Equity securities are included in “other assets” on
the Consolidated Balance Sheets.
The Company elected a measurement alternative for the three private
equity funds that allows the securities to remain at cost until
an impairment is identified or an observable price change for an identical
or similar investment of the same issuer occurs. Impairment is
recorded when there is evidence that the expected fair value of the
investment has declined to below the recorded cost. No such events
occurred during the three or nine-month periods ended September
30, 2022.
The following is a summary of the unrealized and realized gains and losses on equity
securities recognized in net income:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2022
2021
2022
2021
(Dollars in thousands)
Net gains (losses) recognized during the reporting period on equity securities
$
(87)
$
(6,210)
$
(261)
$
(6,243)
Less: net gains recognized during the reporting period on equity securities sold
during the reporting period
-
-
-
-
Unrealized gains (losses) recognized during the reporting period on equity
securities stillshares 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
(58,195)
(64,127)
Additional paid-in capital
542,191
530,658
Retained earnings
254,855
206,095
Accumulated other comprehensive loss
(96,333)
(64,557)
Total stockholders’ equity
643,051
608,599
Total liabilities and stockholders’
equity
$
7,179,479
$
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
Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
(Dollars in thousands except per share data)
Interest Income
Loans, including fees
$
103,631
$
59,211
$
292,231
$
149,266
Available-for-sale securities - taxable
3,089
1,119
7,560
3,250
Available-for-sale securities - tax-exempt
3,365
3,905
10,730
11,442
Deposits with financial institutions
2,444
1,193
6,067
1,714
Dividends on bank stocks
127
122
753
478
Total interest income
112,656
65,550
317,341
166,150
Interest Expense
Deposits
56,297
14,909
141,685
23,152
Fed funds purchased and repurchase agreements
5
9
51
83
Federal Home Loan Bank Advances
1,003
898
7,128
3,302
Other borrowings
224
39
590
94
Total interest expense
57,529
15,855
149,454
26,631
Net Interest Income
55,127
49,695
167,887
139,519
Provision for Credit Losses
3,329
3,334
10,390
4,844
Net Interest Income after Provision for Credit Losses
51,798
46,361
157,497
134,675
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:
 
As of September 30, 2022
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Commercial and industrial
Pass
$
285,880
$
287,991
$
70,591
$
55,167
$
55,665
$
21,134
$
-
$
30,392
$
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
-
-
-
-
-
-
-
-
-
Total
$
287,163
$
290,791
$
84,139
$
58,334
$
58,108
$
21,992
$
-
$
57,309
$
857,836
Commercial and industrial
 
lines
Service charges and fees on customer accounts
2,249
1,566
6,188
4,520
ATM and credit card interchange income
1,436
1,326
3,913
5,513
Gain on sale of creditloans
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
-
-
-
-
-739
-
2,131
-
2,131Income from bank-owned life insurance
Substandard - non-437
accrual405
1,266
1,200
Swap fees and credit valuation adjustments, net
57
(7)
231
123
Other non-interest income
1,063
490
2,452
1,566
Total non-interest income
5,981
3,780
16,181
12,922
Non-Interest Expense
Salaries and employee benefits
22,017
18,252
68,700
53,288
Occupancy
3,183
2,736
9,211
7,851
Professional fees
1,945
580
5,533
2,453
Deposit insurance premiums
1,947
903
5,359
2,355
Data processing
904
877
3,203
2,849
Advertising
593
796
1,994
2,247
Software and communication
1,898
1,222
5,204
3,689
Foreclosed assets, net
-
-9
-128
-(30)
-Other non-interest expense
-2,945
3,3753,057
-9,980
3,37510,559
DoubtfulCore deposit intangible amortization
-922
-19
-2,546
-
-
-
1,788
-
1,78858
Total non-interest expense
36,354
28,451
111,858
85,319
Net Income Before Taxes
21,425
21,690
61,820
62,278
Income tax expense
$
7,4464,562
$
4034,410
$
24612,802
$
-12,625
Net Income
$
716,863
$
-17,280
$
170,56549,018
$
18849,653
Basic Earnings Per Common Share
$
178,8550.34
$
0.35
$
1.00
$
1.00
Diluted Earnings Per Common Share
$
0.34
$
0.35
$
0.99
$
0.99
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (unaudited)– Unaudited
246
CROSSFIRST BANKSHARES, INC.
AsConsolidated Statements of Comprehensive Income (Loss) – Unaudited
Three Months Ended
Nine Months Ended
September 30, 2022
Amortized Cost Basis by Origination Year and Internal Risk RatingSeptember 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
$
270,66916,863
$
259,29917,280
$
145,53049,018
$
110,15549,653
Other Comprehensive Loss
Unrealized loss on available-for-sale securities
(41,604)
(39,299)
(37,083)
(137,282)
Less: income tax benefit
(9,902)
(9,621)
(8,727)
(33,607)
Unrealized loss on available-for-sale securities
(31,702)
(29,678)
(28,356)
(103,675)
Reclassification adjustment for realized (loss) gain included in
income
(60)
(4)
3
(43)
Less: income tax expense (benefit)
(14)
(1)
1
(11)
Less: reclassification adjustment for realized (losses) gains
included in income, net of income tax
(46)
(3)
2
(32)
Unrealized loss on cash flow hedges
(2,289)
(7,076)
(4,381)
(3,036)
Less: income tax benefit
(545)
(1,731)
(1,041)
(741)
Unrealized loss on cash flow hedges, net of income tax
(1,744)
(5,345)
(3,340)
(2,295)
Reclassification adjustment for interest income included in
income
93
-
102
-
Less: income tax expense
22
-
24
-
Less: reclassification adjustment for interest income included in
income, net of income tax
71
-
78
-
Other comprehensive loss
(33,471)
(35,020)
(31,776)
(105,938)
Comprehensive (Loss) Income
$
67,990(16,608)
$(17,740)
74,46517,242
$(56,285)
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements (unaudited)– Unaudited
7
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Stockholders’
Equity – Unaudited
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 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 - available-for-
sale securities
-
-
-
-
-
-
-
(29,676)
(29,676)
Other comprehensive loss - cash flow
hedges
-
-
-
-
-
-
-
(5,344)
(5,344)
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 at September 30, 2022
-
$
-
48,787,696
$
530
$
(59,328)
$
529,646
$
194,148
$
(84,449)
$
580,547
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 June 30, 2023
7,750
$
-
48,653,487
$
532
$
(64,127)
$
539,793
$
238,147
$
(62,862)
$
651,483
Net income
-
-
-
-
-
-
16,863
-
16,863
Other comprehensive loss - available-for-
sale securities
-
-
-
-
-
-
-
(31,656)
(31,656)
Other comprehensive loss - cash flow
hedges
-
-
-
-
-
-
(1,815)
(1,815)
Preferred dividends $
20.00
per share
-
-
-
-
-
-
(155)
-
(155)
Issuance of shares from equity-based
awards
-
-
43,904
1
-
165
-
-
166
Acquisition - purchase accounting
-
-
597,645
-
5,932
1,025
-
-
6,957
Stock-based compensation
-
-
-
-
-
1,208
-
-
1,208
Balance September 30, 2023
7,750
$
-
49,295,036
$
533
$
(58,195)
$
542,191
$
254,855
$
(96,333)
$
643,051
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, 2021
-
$
-
50,450,045
$
526
$
(28,347)
$
526,806
$
147,099
$
21,489
$
667,573
Adoption of ASU 2016-13
-
-
-
-
-
-
(2,610)
-
(2,610)
Net income
-
-
-
-
-
-
49,653
-
49,653
Other comprehensive loss - available-for-
sale securities
-
-
-
-
-
-
-
(103,643)
(103,643)
Other comprehensive loss
- cash flow
hedges
-
-
-
-
-
-
(2,295)
(2,295)
Issuance of shares from equity-based
awards
-
-
428,433
4
-
(464)
-
-
(460)
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
Balance at September 30, 2022
-
$
-
48,787,696
$
530
$
(59,328)
$
529,646
$
194,148
$
(84,449)
$
580,547
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
-
-
-
-
-
-
49,018
-
49,018
Other comprehensive loss - available-for-
sale securities
-
-
-
-
-
-
-
(28,358)
(28,358)
Other comprehensive loss
- cash flow
hedges
-
-
-
-
-
-
(3,418)
(3,418)
Issuance of preferred shares
7,750
-
-
-
-
7,750
-
-
7,750
Preferred dividends $
33.33
per share
-
-
-
-
-
-
(258)
-
(258)
Issuance of shares from equity-based
awards
-
-
249,176
3
-
(535)
-
-
(532)
Warrants exercised, cash settled
-
-
-
-
(418)
-
-
(418)
Acquisition - purchase accounting
-
-
597,645
-
5,932
1,025
-
-
6,957
Stock-based compensation
-
-
-
-
-
3,711
-
-
3,711
Balance September 30, 2023
7,750
$
-
49,295,036
$
533
$
(58,195)
$
542,191
$
254,855
$
(96,333)
$
643,051
See Notes to Consolidated Financial Statements – Unaudited
9
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Cash Flows – Unaudited
Nine Months Ended
September 30,
2023
2022
(Dollars in thousands)
Operating Activities
Net income
$
49,018
$
49,653
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
7,041
3,716
Provision for credit losses
10,390
4,844
Accretion of discounts on loans
(2,029)
-
Accretion of discounts and amortization of premiums on securities
2,378
3,259
Equity based compensation
3,711
3,304
Gain on disposal of fixed assets
(67)
-
Loss on sale of foreclosed assets and related impairments
80
-
Gain on sale of loans
(2,131)
-
Origination of loans held for sale
(36,972)
-
Proceeds from sales of loans held for sale
39,775
-
Deferred income taxes
(1,208)
1,713
Net increase in bank owned life insurance
(1,266)
(1,200)
Net realized (gains) losses on available-for-sale securities
(3)
43
Dividends on FHLB stock
(745)
(505)
Changes in:
Interest receivable
(5,612)
(4,530)
Other assets
2,132
4,568
Other liabilities
6,691
(2,989)
Net cash provided by operating activities
71,183
61,876
Investing Activities
Net change in loans
(470,706)
(425,494)
Purchases of available-for-sale securities
(152,158)
(82,305)
Proceeds from maturities of available-for-sale securities
18,890
29,587
Proceeds from sale of available-for-sale securities
67,230
-
Proceeds from the sale of foreclosed assets
1,050
237
Purchase of premises and equipment
(6,953)
(1,878)
Proceeds from the sale of premises and equipment and related
insurance claims
67
-
Purchase of restricted equity securities
(10,290)
(6,957)
Proceeds from sale of restricted equity securities
21,006
10,111
Net cash activity from acquisition
19,279
-
Net cash used in investing activities
(512,585)
(476,699)
Financing Activities
Net (decrease) increase in demand deposits, savings, NOW and
money market accounts
(264,944)
178,134
Net increase in time deposits
779,701
125,784
Net increase in fed funds purchased and repurchase agreements
505
-
Net decrease in federal funds sold
(20,000)
-
Proceeds from Federal Home Loan Bank advances
22,414
50,000
Repayment of Federal Home Loan Bank advances
(77,295)
(149,000)
Net (repayments) proceeds of Federal Home Loan Bank line of credit
(72,468)
67,748
Proceeds from issuance of preferred shares, net of issuance cost
7,750
-
Issuance of common shares, net of issuance cost
3
171
Proceeds from employee stock purchase plan
402
364
Repurchase of common stock
-
(30,981)
Acquisition of common stock for tax withholding obligations
(937)
(995)
Settlement of warrants
(418)
-
Dividends paid on preferred stock
(258)
-
Net decrease in employee receivables
-
6
Net cash provided by financing activities
374,455
241,231
Decrease in Cash and Cash Equivalents
(66,947)
(173,592)
Cash and Cash Equivalents, Beginning of Period
300,138
482,727
Cash and Cash Equivalents, End of Period
$
233,191
$
309,135
Supplemental Cash Flows Information
Interest paid
$
137,281
$
25,648
Income taxes paid
$
17,614
$
10,545
10
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 full-service 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; (xii) Clayton, New Mexico; and (xiii) Tucson, Arizona.
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 $
10
million and $
13
million while related party deposits totaled $
99
million and $
92
million at September 30, 2023 and
December 31, 2022, respectively.
11
Note 2:
Acquisition Activities
On August 1, 2023, the Company completed its acquisition of Canyon Bancorporation, Inc. and 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 (the
“Tucson acquisition”). 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 within Arizona to the Company’s
footprint thereby deepening
our Arizona franchise.
Tucson acquisition-related costs totaled $
2.2
million and $
2.3
million for the three- and nine-months ended September 30, 2023,
respectively, including a Day 1 CECL provision expense of $
0.9
million. Acquisition-related costs in connection with the acquisition of
Farmers & Stockmens Bank (the “Colorado/New Mexico acquisition”) totaled
$
1.7
million for the nine-months ended September 30,
2023.
Acquisition-related costs were included in the Company’s
consolidated statements of operations.
The results of both acquisitions
mentioned above are included in the results of the Company subsequent to the acquisition
dates and reported in this quarterly report on
Form 10-Q.
The Company determined that the Tucson acquisition constitutes a business combination as
defined in Accounting Standard
Codification (“ASC”) Topic 805, Business Combinations. Accordingly, as of the date of the acquisition, the Company recorded
the
assets acquired and liabilities assumed at fair value. The Company determined fair values
in accordance with the guidance provided in
ASC Topic 820, Fair Value Measurements and Disclosures. In many cases, the determination of these fair values
required management
to make estimates about discount rates, future expected cash flows, market conditions and
other future events that are highly subjective
in nature and subject to change. Actual results could differ materially. The Company has made the determination of fair values using the
best information available at the time; however, purchase accounting is not complete
and the assumptions used are subject to change
and, if changed, could have a material effect on the Company's financial position and results
of operations.
12
The table below summarizes preliminary net assets acquired (at fair value) and consideration
transferred in connection with the
Tucson acquisition:
August 1, 2023
(Dollars in thousands)
Assets:
$
Cash and cash equivalents
28,366
Available-for-sale securities
38,084
Loans, net of unearned fees
105,668
Premises and equipment
1,335
Restricted equity securities
1,810
Interest receivable
695
Core deposit intangible
4,459
Other
1,277
Total assets acquired
181,694
Liabilities:
Total deposits
165,399
Other borrowings
1,050
Interest payable and other liabilities
500
Total liabilities assumed
166,949
Identifiable net assets acquired
$
14,745
Consideration:
Cash
9,087
Stock
6,957
Total consideration
16,044
Goodwill
$
1,299
In connection with the Tucson acquisition, the Company recorded $
1.3
million of goodwill. The amount of goodwill recorded
reflects the expanded market presence, synergies and operational efficiencies that
are expected to result from the acquisition. The
following is a description of the methods used to determine the fair values of significant
assets and liabilities presented above:
Cash and cash equivalents
—The carrying amount of these assets was deemed a reasonable estimate of fair value based
on the
short-term nature of these assets.
Loans, net
—The fair value of loans was based on a discounted cash flow methodology. Inputs and assumptions
used in the fair
value estimate of the loan portfolio, includes interest rate, servicing, credit and liquidity risk,
and required equity return. The fair value
of loans was calculated using a discounted cash flow analysis based on the remaining
maturity and repricing terms. Cash flows were
adjusted by estimating future credit losses and the rate of prepayments. Projected
monthly cash flows were then discounted to present
value using a risk-adjusted market rate for similar loans.
Core deposit intangibles
—The Company identified customer relationships, in the form of core deposit intangibles,
as an
identified intangible asset. Core deposit intangibles derive value from the expected
future benefits or earnings capacity attributable to the
acquired core deposits. The core deposit intangible was valued by identifying the expected future benefits of
the core deposits and
discounting those benefits back to present value. The core deposit intangible will be
amortized over its estimated useful life of
approximately
10 years
using the sum of the years’ digits accelerated method.
13
Deposits
—By definition, the fair value of demand and saving deposits equals the amount
payable. For time deposits acquired, the
Company utilized an income approach, discounting the contractual cash flows on the instruments
over their remaining contractual lives
at prevailing market rates.
The fair value of the acquired assets and liabilities noted in the table may change during the
provisional period, which may last up
to twelve months subsequent to the acquisition date. The Company may obtain additional information to refine
the valuation of the
acquired assets and liabilities and adjust the recorded fair value.
Accounting for acquired loans
Loans acquired are recorded at fair value with no carryover of the related allowance
for credit losses. Purchased-credit
deteriorated loans (“PCD”) are loans that have experienced more than insignificant
credit deterioration since origination and are
recorded at the purchase price. Management determined that past due loans, adversely risk
rated, on non-accrual or considered a
troubled-debt restructured loan constituted insignificant credit deterioration. The sum of the loan’s
purchase price and the allowance for
credit losses becomes its initial amortized cost basis. The difference between the initial amortized
cost basis and the par value of the loan
is a noncredit discount or premium, which is amortized into interest income over the
life of the loan.
Non-PCD loans have not experienced a more than insignificant deterioration
in credit quality since origination. The difference
between the fair value and outstanding balance of the non-PCD loans is recognized
as an adjustment to interest income over the lives of
the loan.
A Day 1 CECL allowance for credit losses on the non-PCD loans was recorded through provision for credit loss expense within
the consolidated statements of operations. At the date of acquisition, of the $
105.7
million of loans acquired from Canyon, $
26.0
million, or
25
% of Canyon’s loan portfolio, were accounted
for as PCD loans.
The following table provides a summary of PCD loans purchased as part of the Tucson
acquisition as of the acquisition date:
Total
(Dollars in thousands)
Unpaid principal balance
$
28,159
PCD allowance for credit loss at acquisition
(329)
(Discount) premium on acquired loans
(1,809)
Purchase price of PCD loans
$
26,021
14
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, 2023
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
U.S. Treasury securities
$
14,797
$
6
$
-
$
14,803
Mortgage-backed - GSE residential
336,020
-
37,976
298,044
Collateralized mortgage obligations - GSE residential
19,780
-
1,056
18,724
State and political subdivisions
489,976
90
79,624
410,442
Corporate bonds
9,740
-
1,266
8,474
Total available-for-sale securities
$
870,313
$
96
$
119,922
$
750,487
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 $
15
million and $
22
million at September 30, 2023 and December 31,
2022, respectively.
As of September 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 Nine Months Ended
September 30, 2023
September 30, 2023
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Gain
(Dollars in thousands)
Available-for-sale securities
$
68
$
(128)
$
(60)
$
335
$
(332)
$
3
15
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)
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
September 30, 2023 and December 31, 2022:
September 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
U.S. Treasury
securities
$
-
$
-
-
$
-
$
-
-
$
-
$
-
-
Mortgage-backed -
GSE residential
166,408
7,398
27
131,637
30,578
56
298,045
37,976
83
Collateralized
mortgage obligations
- GSE residential
5,255
282
2
8,786
774
19
14,041
1,056
21
State and political
subdivisions
119,719
5,433
112
277,722
74,191
213
397,441
79,624
325
Corporate bonds
4,333
667
1
4,141
599
4
8,474
1,266
5
Total temporarily
impaired securities
295,715
$
13,780
142
$
422,286
$
106,142
292
$
718,001
$
119,922
434
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
16
Based on the Company’s evaluation at each respective
period end, we recorded
no
credit loss impairment during the nine-months
ended September 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 September 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.
The amortized cost, fair value, and weighted average yield of available-for-sale securities at
September 30, 2023, by contractual
maturity, are shown below:
September 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
U.S. Treasury securities
(1)
Amortized cost
$
14,797
$
-
$
-
$
-
$
14,797
Estimated fair value
$
14,803
$
-
$
-
$
-
$
14,803
Weighted average yield
(2)
5.11
%
-
%
-
%
-
%
5.11
%
Mortgage-backed - GSE residential
(1)
Amortized cost
$
-
$
14
$
1,007
$
334,999
$
336,020
Estimated fair value
$
-
$
13
$
891
$
297,140
$
298,044
Weighted average yield
(2)
-
%
4.88
%
2.39
%
3.59
%
3.58
%
Collateralized mortgage obligations -
GSE residential
Amortized cost
$
-
$
-
$
2,267
$
17,513
$
19,780
Estimated fair value
$
-
$
-
$
2,117
$
16,607
$
18,724
Weighted average yield
(2)
-
%
-
%
2.77
%
4.93
%
4.68
%
State and political subdivisions
Amortized cost
$
744
$
5,022
$
93,874
$
390,336
$
489,976
Estimated fair value
$
752
$
4,989
$
90,036
$
314,665
$
410,442
Weighted average yield
(2)
3.81
%
4.42
%
3.09
%
2.71
%
2.80
%
Corporate bonds
Amortized cost
$
-
$
143
$
9,597
$
-
$
9,740
Estimated fair value
$
-
$
139
$
8,335
$
-
$
8,474
Weighted average yield
(2)
-
%
4.22
%
5.71
%
-
%
5.69
%
Total available-for-sale securities
Amortized cost
$
15,541
$
5,179
$
106,745
$
742,848
$
870,313
Estimated fair value
$
15,555
$
5,141
$
101,379
$
628,412
$
750,487
Weighted average yield
5.05
%
4.41
%
3.32
%
3.16
%
3.21
%
(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 $
5
million of private equity investments and $
4
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 its 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 nine-month period ended September 30,
2023.
17
The following is a summary of the unrealized and realized gains and losses on equity securities
recognized in net income:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
(Dollars in thousands)
Net gains (losses) recognized during the reporting period on equity securities
$
98
$
(87)
$
114
$
(261)
Less: net gains recognized during the reporting period on equity securities sold
during the reporting period
93
-
93
-
Unrealized gains (losses) recognized during the reporting period on equity
securities still held at the reporting date
$
5
$
(87)
$
21
$
(261)
18
Note 4:
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 $
26
million and $
24
million as of September 30, 2023 and December 31, 2022, respectively.
September 30, 2023
December 31, 2022
Amount
% of Loans
Amount
% of Loans
(Dollars in thousands)
Commercial and industrial
$
2,056,171
34
%
$
1,974,932
37
%
Energy
214,166
4
173,218
3
Commercial real estate - owner-occupied
583,442
10
437,119
8
Commercial real estate - non-owner-occupied
2,592,684
43
2,314,600
43
Residential real estate
456,047
8
439,367
8
Consumer
43,243
1
33,493
1
Loans, net of unearned fees
5,945,753
100
%
5,372,729
100
%
Less: allowance for credit losses on loans
(71,556)
(61,775)
Loans, net of the allowance for credit losses on loans
$
5,874,197
$
5,310,954
Accrued interest of $
29
million and $
23
million at September 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.
19
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. 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.
20
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.
21
●
Loss (risk rating 8)
- Credits that 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 September 30,
2023 and
December 31, 2022:
As of September 30, 20222023
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2023
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Multifamily real estateCommercial and industrial
Pass
$
78,194320,587
$
33,272268,333
$
5,363205,175
$
12,00561,917
$
3,07842,458
$
82226,244
$
126,518964,811
$
16,50648,584
$
275,7581,938,109
Special mention
-13,314
-5,650
-11,072
-32
-204
-30
-30,308
376,184
3766,794
Substandard - accrual
-1,408
-546
-68
-271
-787
-831
-19,252
-17,111
-40,274
Substandard - non-
accrual
-
-
-
-24
-
-
-10,785
-185
-10,994
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
78,194335,309
$
33,272274,529
$
5,363216,315
$
12,00562,244
$
3,07843,449
$
82227,105
$
126,5181,025,156
$
16,54372,064
$
275,7952,056,171
ConsumerEnergy
Pass
$
11,629
$
2,512
$
1,914
$
221
$
110
$
30
$
49,311
$
-
$
65,7277,075
$
-
$
174
$
-
$
-
$
206,384
$
125
$
213,758
Special mention
-
-
-
-
-
-
-
-
-
Substandard - accrual
-
-
-
-
-
-
-
-
-
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-408
-
-408
Total
$
11,629
$
2,512
$
1,914
$
221
$
110
$
30
$
49,311
$
-
$
65,7277,075
Total$
-
$
174
$
-
$
-
$
206,792
$
125
$
214,166
Commercial real estate
- owner-occupied
Pass
$
923,42041,733
$
953,46592,985
$
470,899129,798
$
247,89462,822
$
168,93046,925
$
133,40837,629
$
1,422,40089,539
$
145,86937,584
$
4,466,285539,015
Special mention
13,46310,187
23,2317,396
12,0632,746
1,6492,178
6,582798
4027,310
42,386-
39,624580
139,40031,195
Substandard - accrual
10,6773,041
455-
4,9785,892
2,1651,639
758857
1,27871
13,319-
21,4081,528
55,03813,028
Substandard - non-
accrual
408
2,593-
-
6204
1,383-
700-
9,850-
195-
15,135-
204
Doubtful
-
-
-
-
-
-
1,788-
-
1,788-
Total
$
947,96854,961
$
979,744100,381
$
487,940138,640
$
251,71466,639
$
177,65348,580
$
135,78845,010
$
1,489,74389,539
$
207,09639,692
$
4,677,646583,442
22
As of September 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
$
392,980
$
876,727
$
291,711
$
162,183
$
83,502
$
61,611
$
561,670
$
91,198
$
2,521,582
Special mention
-
19,682
-
114
16,234
4,102
-
32
40,164
Substandard - accrual
10,443
-
7,530
3,625
-
309
-
439
22,346
Substandard - non-
accrual
-
-
8,448
144
-
-
-
-
8,592
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
403,423
$
896,409
$
307,689
$
166,066
$
99,736
$
66,022
$
561,670
$
91,669
$
2,592,684
Residential real estate
Pass
$
29,272
$
85,249
$
84,931
$
113,631
$
38,427
$
64,493
$
30,418
$
-
$
446,421
Special mention
-
647
3,540
176
-
-
-
-
4,363
Substandard - accrual
253
-
1,320
3,125
207
-
176
-
5,081
Substandard - non-
accrual
-
-
-
-
-
-
-
182
182
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
29,525
$
85,896
$
89,791
$
116,932
$
38,634
$
64,493
$
30,594
$
182
$
456,047
Consumer
Pass
$
10,737
$
6,429
$
533
$
69
$
235
$
140
$
25,068
$
-
$
43,211
Special mention
-
-
-
-
-
6
-
-
6
Substandard - accrual
-
-
-
26
-
-
-
-
26
Substandard - non-
accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Total
$
10,737
$
6,429
$
533
$
95
$
235
$
146
$
25,068
$
-
$
43,243
23
As of September 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
$
795,309
$
1,336,798
$
712,148
$
400,796
$
211,547
$
190,117
$
1,877,890
$
177,491
$
5,702,096
Special mention
23,501
33,375
17,358
2,500
17,236
11,448
30,308
6,796
142,522
Substandard - accrual
15,145
546
14,810
8,686
1,851
1,211
19,428
19,078
80,755
Substandard - non-
accrual
-
-
8,652
168
-
-
10,785
367
19,972
Doubtful
-
-
-
-
-
-
408
-
408
Total
$
833,955
$
1,370,719
$
752,968
$
412,150
$
230,634
$
202,776
$
1,938,819
$
203,732
$
5,945,753
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)
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
25
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
26
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
 
27
Loan Portfolio Aging Analysis
The following tables present the Company’s
loan portfolio aging analysis as of September 30, 2023 and December 31,
2022:
As of September 30, 2023
Amortized Cost Basis by Origination Year and Past Due Status
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
30-59 days
$
54
$
18
$
-
$
24
$
-
$
-
$
1,488
$
2,089
$
3,673
60-89 days
-
-
-
-
593
235
4,360
181
5,369
Greater than 90 days
-
30
76
-
-
-
11,162
13,605
24,873
Total past due
54
48
76
24
593
235
17,010
15,875
33,915
Current
335,255
274,481
216,239
62,220
42,856
26,870
1,008,146
56,189
2,022,256
Total
$
335,309
$
274,529
$
216,315
$
62,244
$
43,449
$
27,105
$
1,025,156
$
72,064
$
2,056,171
Greater than 90 days
and accruing
$
-
$
30
$
76
$
-
$
-
$
-
$
543
$
13,605
$
14,254
Energy
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
408
-
408
Total past due
-
-
-
-
-
-
408
-
408
Current
-
7,075
-
174
-
-
206,384
125
213,758
Total
$
-
$
7,075
$
-
$
174
$
-
$
-
$
206,792
$
125
$
214,166
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
28
As of September 30, 2023
Amortized Cost Basis by Origination Year and Past Due Status
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
- owner-occupied
30-59 days
$
-
$
-
$
5,892
$
-
$
232
$
-
$
-
$
-
$
6,124
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
204
-
-
-
-
-
204
Total past due
-
-
6,096
-
232
-
-
-
6,328
Current
54,961
100,381
132,544
66,639
48,348
45,010
89,539
39,692
577,114
Total
$
54,961
$
100,381
$
138,640
$
66,639
$
48,580
$
45,010
$
89,539
$
39,692
$
583,442
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial real estate - non-owner-occupied
30-59 days
$
4,511
$
1,775
$
-
$
-
$
-
$
-
$
249
$
-
$
6,535
60-89 days
-
-
7,530
144
-
-
-
-
7,674
Greater than 90 days
-
-
6,029
-
-
-
-
-
6,029
Total past due
4,511
1,775
13,559
144
-
-
249
-
20,238
Current
398,912
894,634
294,130
165,922
99,736
66,022
561,421
91,669
2,572,446
Total
$
403,423
$
896,409
$
307,689
$
166,066
$
99,736
$
66,022
$
561,670
$
91,669
$
2,592,684
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential real estate
30-59 days
$
-
$
14
$
-
$
-
$
-
$
-
$
-
$
-
$
14
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
1,320
-
-
-
176
-
1,496
Total past due
-
14
1,320
-
-
-
176
-
1,510
Current
29,525
85,882
88,471
116,932
38,634
64,493
30,418
182
454,537
Total
$
29,525
$
85,896
$
89,791
$
116,932
$
38,634
$
64,493
$
30,594
$
182
$
456,047
Greater than 90 days
and accruing
$
-
$
-
$
1,320
$
-
$
-
$
-
$
176
$
-
$
1,496
29
As of September 30, 2023
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2023
2022
2021
2020
2019
2018 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Consumer
30-59 days
$
-
$
47
$
19
$
-
$
-
$
-
$
-
$
-
$
66
60-89 days
-
2
-
-
-
-
-
-
2
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
49
19
-
-
-
-
-
68
Current
10,737
6,380
514
95
235
146
25,068
-
43,175
Total
$
10,737
$
6,429
$
533
$
95
$
235
$
146
$
25,068
$
-
$
43,243
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Total
30-59 days
$
4,565
$
1,854
$
5,911
$
24
$
232
$
-
$
1,737
$
2,089
$
16,412
60-89 days
-
2
7,530
144
593
235
4,360
181
13,045
Greater than 90 days
-
30
7,629
-
-
-
11,746
13,605
33,010
Total past due
4,565
1,886
21,070
168
825
235
17,843
15,875
62,467
Current
829,390
1,368,833
731,898
411,982
229,809
202,541
1,920,976
187,857
5,883,286
Total
$
833,955
$
1,370,719
$
752,968
$
412,150
$
230,634
$
202,776
$
1,938,819
$
203,732
$
5,945,753
Greater than 90 days
and accruing
$
-
$
30
$
1,396
$
-
$
-
$
-
$
719
$
13,605
$
15,750
30
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
26
Loan Portfolio Aging Analysis
The following tables present the Company’s loan portfolio aging analysis as of September
30, 2022:
As of September 30,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
$
60020
$
-
$
-
$
154,784
$
-
$
-
$
-
$
1,049
$
2,814
$
-
$
6158,667
60-89 days
-
55
-
-
-
-
-980
-430
-
-
-1,465
Greater than 90 days
-
124143
7
756
1,383
65512
7,063
-
-
2,2448,614
Total past due
60020
1244,982
7
906
1,383
6551,061
-10,857
-430
2,85918,746
Current
286,563468,764
290,667300,020
84,13272,147
58,24454,726
56,72554,282
21,33719,984
-946,397
57,30939,866
854,9771,956,186
Total
$
287,163468,784
$
290,791305,002
$
84,13972,154
$
58,33454,732
$
58,10855,665
$
21,99221,045
$
-957,254
$
57,30940,296
$
857,8361,974,932
Greater than 90 days
and accruing
$
-
$
2039
$
7
$
73
$
-
$
-
$
-
$
-
$
100
Commercial and industrial lines of credit
30-59 days584
$
-
$
-
$
-
$
-
$
-
$
-
$
3,796
$
-
$
3,796
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
1,568
-
1,568
Total past due
-
-
-
-
-
-
5,364
-
5,364
Current
-
-
-
-
-
-
825,823
-
825,823
Total
$
-
$
-
$
-
$
-
$
-
$
-
$
831,187
$
-
$
831,187
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
83
$
-
$
83630
Energy
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
5,163618
-
5,163618
Total past due
-
-
-
-
-
-
5,163618
-
5,163618
Current
7,4467,585
403306
246228
-
7-
-
165,402164,310
188171
173,692172,600
Total
$
7,4467,585
$
403306
$
246
$
-
$
7
$
-
$
170,565
$
188
$
178,855
Greater than 90 days
and accruing228
$
-
$
-
$
-
$
-164,928
$
-171
$
-
$
-
$
-
$
-
��
Notes to Condensed Consolidated Financial Statements (unaudited)
27
As of September 30, 2022
Amortized Cost Basis by Origination Year and Past Due Status
Amortized Cost Basis
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total
(Dollars in thousands)
Commercial real estate
30-59 days
$
408
$
-
$
-
$
-
$
-
$
195
$
-
$
-
$
603
60-89 days
-
-
-
-
-
1,032
-
-
1,032
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
408
-
-
-
-
1,227
-
-
1,635
Current
293,131
271,658
145,857
110,577
74,270
74,760
295,589
132,861
1,398,703
Total
$
293,539
$
271,658
$
145,857
$
110,577
$
74,270
$
75,987
$
295,589
$
132,861
$
1,400,338173,218
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Construction and land developmentCommercial real estate
- owner-occupied
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
10,629-
$
-
$
10,629-
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
-
-
-
-
10,629-
-
10,629-
Current
205,06296,987
298,583134,092
126,36457,462
24,32350,950
3,66328,241
1,36724,080
4,05028,814
-16,493
663,412437,119
Total
$
205,06296,987
$
298,583134,092
$
126,36457,462
$
24,32350,950
$
3,66328,241
$
1,36724,080
$
14,67928,814
$
-16,493
$
674,041437,119
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
31
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
28
As of September 30,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)
MultifamilyCommercial real estate
- non-owner-occupied
30-59 days
$
4,293
$
-
$
-
$
1,180
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
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
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-5,473
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
4,293
-
-
1,180
-
-
-
-
-
-
-
-5,473
Current
11,629839,603
2,512452,692
1,914200,811
221100,729
11056,354
3076,046
49,311460,726
-122,166
65,7272,309,127
Total
$
11,629843,896
$
2,512452,692
$
1,914200,811
$
221101,909
$
11056,354
$
3076,046
$
49,311460,726
$
-122,166
$
65,7272,314,600
Greater than 90 days
and accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
TotalResidential real estate
30-59 days
$
1,150-
$
3,867
$
-
$
10
$
-
$
-
$
1530
$
-
$
195
$
14,425
$
-
$
15,7853,907
60-89 days
4,566
-
-
-
-
1,032-
-
-
5,598-
-
Greater than 90 days
-
244
7
75
1,383
655
6,731120
-
9,095-
-
-
-
-
120
Total past due
5,716-
244
7
90
1,383
1,882
21,1563,987
-
30,47810
-
-
30
-
4,027
Current
942,25277,703
979,50083,443
487,933124,413
251,62445,481
176,27037,395
133,90634,852
1,468,58731,862
207,096191
4,647,168435,340
Total
$
947,96877,703
$
979,74487,430
$
487,940124,413
$
251,71445,491
$
177,65337,395
$
135,78834,852
$
1,489,74331,892
$
207,096191
$
4,677,646439,367
Greater than 90 days
and accruing
$
-
$
140
$
7
$
73120
$
-
$
-
$
83-
$
-
$
303-
$
-
$
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
33
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 September 30, 2023 and December
31, 2022:
As of September 30, 2023
Amortized Cost Basis by Origination Year and On Nonaccrual
Amortized Cost Basis
2023
2022
2021
2020
2019
2018 and
Prior
Revolving
loans
Revolving
loans
converted
to term
loans
Total
Nonaccrual
Loans
Nonaccrual
Loans with no
related
Allowance
(Dollars in thousands)
Commercial and industrial
$
-
$
-
$
8
$
24
$
-
$
-
$
10,777
$
185
$
10,994
$
6,720
Energy
-
-
-
-
-
-
408
-
408
408
Commercial real estate -
owner-occupied
-
-
204
-
-
-
-
-
204
204
Commercial real estate -
non-owner-occupied
-
-
8,448
144
-
-
-
-
8,592
8,592
Residential real estate
-
-
-
-
-
-
-
182
182
182
Consumer
-
-
-
-
-
-
-
-
-
-
Total
$
-
$
-
$
8,660
$
168
$
-
$
-
$
11,185
$
367
$
20,380
$
16,106
34
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
Nonaccrual
Loans
Nonaccrual
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
We recognized
no
interest income on non-accrual loans during the three- and nine-months
ended September 30, 2023.
For the three-and nine-months ended September 30, 2022, the
interest income recognized on non-accrual loans was $
0.9
million and $
1.3
million, respectively.
35
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 nine-months ended September 30, 2023:
For the Three Months Ended September 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
$
28,929
$
4,914
$
6,361
$
23,981
$
3,268
$
114
$
67,567
PCD allowance for credit loss at acquisition
51
-
61
217
-
-
329
Charge-offs
(1,418)
-
-
-
-
-
(1,418)
Recoveries
147
2
-
-
-
-
149
Provision (release)
2,977
(573)
678
775
187
(15)
4,029
Day 1 CECL provision expense
58
-
194
643
5
-
900
Ending balance
$
30,744
$
4,343
$
7,294
$
25,616
$
3,460
$
99
$
71,556
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:
Beginning balance
$
449
$
496
$
205
$
6,496
$
67
$
-
$
7,713
Provision (release)
(264)
(322)
59
(1,070)
(3)
-
(1,600)
Ending balance
$
185
$
174
$
264
$
5,426
$
64
$
-
$
6,113
The ACL increased $
4.0
million during the quarter and included provision of $
4.0
million due to changes in credit quality, economic factors, an increase in specific reserves
and loan growth.
Net charge-offs totaled $
1.3
million, primarily due to one commercial and industrial loan that was previously reserved.
The quarter also included increases of $
0.3
million for reserves on PCD loans and $
0.9
million of Day 1 CECL provision expense on non-PCD loans related to the Tucson acquisition.
The reserve on unfunded commitments
decreased $
1.6
million due to a decrease in unfunded commitments in the quarter.
36
For the Nine Months Ended September 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
PCD allowance for credit loss at acquisition
51
-
61
217
-
-
329
Charge-offs
(3,798)
-
-
-
-
(5)
(3,803)
Recoveries
151
139
-
-
-
-
290
Provision (release)
7,479
(192)
1,825
2,876
122
(45)
12,065
Day 1 CECL provision expense
58
-
194
643
5
-
900
Ending balance
$
30,744
$
4,343
$
7,294
$
25,616
$
3,460
$
99
$
71,556
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures:
Beginning balance
$
319
$
787
$
221
$
7,323
$
35
$
3
$
8,688
Provision (release)
(134)
(613)
43
(1,897)
29
(3)
(2,575)
Ending balance
$
185
$
174
$
264
$
5,426
$
64
$
-
$
6,113
The ACL increased $
9.8
million during the nine-months ended September 30, 2023 and included provision of $
12.1
million due to loan growth, changes in credit quality,
economic factors and an increase in specific reserves.
Net charge-offs were $
3.5
million, primarily due to four commercial and industrial loans.
The year-to-date increase also
included increases of $
0.3
million for reserves on PCD loans and $
0.9
million of Day 1 CECL provision expense as noted above.
The reserve on unfunded commitments decreased
$
2.6
million due to a decrease in unfunded commitments.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements (unaudited)
2937
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 tables presents the Company’s non-accrualgross
 
loanscharge-offs by loan segments:year of origination for the three- and nine-months ended
September 30, 2023:
As of
For the Quarter Ended September 30, 20222023
Amortized Cost BasisGross Charge-offs by Origination Year and On Non-accrual
Amortized Cost BasisGross Charge-offs
2023
2022
2021
2020
2019
2018
2017 and
Prior
Revolving
loans
Revolving
loans
converted
to term
loans
Total Non-Gross
accrualCharge-
Loans
Non-accrual
Loans with no
related
Allowanceoffs
(Dollars in thousands)
Commercial and industrial
$
-
$
104
$
-
$
6
$
1,383
$
7007
$
-
$
-
$
2,193-
$
2,193
Commercial and industrial
lines of credit
-
-$
-1,262
-$
-143
-$
6,475
-
6,475
6,4751,418
Energy
-
-
-
-
-
-
5,163-
-
5,163
3,587-
Commercial real estate
408
2,489 - owner-occupied
-
-
-
-
-
-
2,897
2,897
Construction and land
development-
-
-
Commercial real estate - non-owner-occupied
-
-
-
-
-
-
-
-
-
Residential real estate
-
-
-
-
-
-
-
195
195
195
Multifamily real estate
-
-
-
-
-
-
-
-
-
-
Consumer
-
-
-
-
-
-
-
-
-
-
Total
$
4086
$
2,5937
$
-
$
6-
$
1,383-
$
700-
$
11,6381,262
$
195143
$
16,9231,418
$
15,347
Interest income recognized
For the Nine Months Ended September 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
$
581
$
7
$
72
$
-
$
-
$
1,358
$
1,262
$
518
$
3,798
Energy
-
-
-
-
-
-
-
-
-
Commercial real estate - owner-occupied
-
-
-
-
-
-
-
-
-
Commercial real estate - non-owner-occupied
-
-
-
-
-
-
-
-
-
Residential real estate
-
-
-
-
-
-
-
-
-
Consumer
-
-
-
-
-
5
-
-
5
Total
$
581
$
7
$
72
$
-
$
-
$
1,363
$
1,262
$
518
$
3,803
38
Collateral Dependent Loans:
Collateral dependent loans are loans for which the repayment is expected to be provided
substantially through the operation or
sale of the collateral and the borrower
is experiencing financial difficulty. The following table presents the amortized cost balance
of
loans considered collateral dependent by loan segment and collateral type
as of September 30, 2023 and December 31, 2022:
As of September 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
$
11,010
$
2,149
$
6,712
Energy
Oil and natural gas properties
408
-
408
Commercial real estate - owner-occupied
Commercial real estate properties
204
-
204
Commercial real estate - non-owner-
occupied
Commercial real estate properties
6,029
-
6,029
Residential real estate
Residential real estate properties
-
-
-
Consumer
Vehicles & other personal assets
-
-
-
$
17,651
$
2,149
$
13,353
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.
39
During the three- and nine-months ended September 30, 2023, the Company
modified
four
and
seven
loans, respectively, with an
amortized cost basis at September 30, 2023 of $
9.2
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:
September 30, 2023
Term Extension
Amortized Cost Basis
% of Loan Class
(Dollars in thousands)
Commercial and industrial
$
4,674
0.2
%
Commercial real estate - owner-occupied
4,569
1.0
Total Loans
$
9,243
The following schedule presents the payment status by loan class, as of September
30, 2023, of the amortized cost basis of loans
that have been modified since January 1, 2023:
September 30, 2023
Current
(Dollars in thousands)
Commercial and industrial
$
4,674
Commercial real estate - owner-occupied
4,569
Total Loans
$
9,243
The Company had no TDMs that were modified and had defaulted on their modified terms
during the nine-months ended
September 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
September 30, 2023:
September 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
0.5
years to the life of loan, which reduced
monthly payment amounts
Troubled Debt Restructurings
Prior to the adoption of ASU 2022-02, TDRs were extended to borrowers who were experiencing financial difficulty and
who had
been granted a concession, excluding loan modifications as a result of the 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 2022-02 was $
28.1
million and $
30.5
million as of
September 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 obligation is unconditionally
cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted as a provision (release) for credit loss expense.
40
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 $
6
million and $
9
million allowance
for credit losses on off-balance sheet credit exposures at September 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 5:
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
eighteen 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, 2023, the Company recognized one finance lease and the remaining Company leases are
classified as
operating leases.
The ROU asset is included in “other assets” on the consolidated statements of financial
condition, and was $
28
million and $
31
million at September 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 $
31
million and $
34
million at September 30, 2023 and December 31, 2022,
respectively.
As of September 30, 2023, the remaining weighted-average lease term is
11.2
years, and the weighted-average discount rate was
2.56
% utilizing the Company’s incremental Federal
Home Loan Bank (“FHLB”) borrowing rate for borrowings of a similar term at the
date of lease commencement.
The following table presents components of operating lease expense in the accompanying
consolidated statements of operations
for the three-and nine-month periods ended September 30, 2023 and
2022:
For the Three Months Ended
September 30,
For the Nine Months Ended
September 30,
2023
2022
2023
2022
(Dollars in thousands)
Finance lease amortization of right-of-use asset
$
71
$
69
$
212
$
161
Finance lease interest on lease liability
67
69
204
115
Operating lease expense
726
603
2,189
1,932
Variable lease expense
487
297
1,368
855
Short-term lease expense
5
5
15
15
Total lease expense
$
1,356
$
1,043
$
3,988
$
3,078
41
Future minimum commitments due under these lease agreements as of September
30, 2023 are as follows:
Operating Leases
Finance Lease
(Dollars in thousands)
Remainder of 2023
$
1,292
$
122
2024
3,289
490
2025
3,309
490
2026
3,350
490
2027
3,340
528
Thereafter
12,619
8,296
Total lease payments
$
27,199
$
10,416
Less imputed interest
3,490
2,959
Total
$
23,709
$
7,457
Supplemental cash flow information –
Operating cash flows paid for operating lease amounts included in the
measurement of
lease liabilities were $
2.7
million and $
2.2
million for the nine-months ended September 30, 2023 and 2022, respectively. Operating
cash flows paid for finance lease amounts included in the measurement of lease liabilities
was $
0.4
million and $
0.2
million for the nine-
months ended September 30, 2023 and 2022, respectively. During the nine-months
ended September 30, 2023, the Company did
no
t
record any ROU assets that were exchanged for operating lease liabilities.
Note 6:
Goodwill and Core Deposit Intangible
In connection with the Tucson acquisition, the Company recorded goodwill of $
1.3
million during the three-months ended
September 30, 2023.
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 nine-months ended
September 30, 2023.
The Company recorded a core deposit intangible (“CDI”) of $
4.5
million during the three-months ended September 30, 2023, as
part of the Tucson acquisition. The Company is amortizing the CDI from the Colorado/New Mexico acquisition
and the Tucson
acquisition over their estimated useful lives of approximately
10
years using the sum of the years’ digits accelerated method. The
Company recognized core deposit intangible amortization expense of $
0.9
 
million and $
1.32.5
 
million for the three- and nine-month
periods ended September 30, 2023,
 
respectively.
The gross carrying amount of goodwill and the gross carrying amount and accumulated
amortization of the CDI at September 30,
2023 and December 31, 2022 were:
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(Dollars in thousands)
September 30, 2023
Goodwill
$
14,135
$
-
$
14,135
Core deposit intangible
21,938
3,780
18,158
Total goodwill and intangible assets
$
36,073
$
3,780
$
32,293
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
42
The following table shows the estimated future amortization expense for the CDI
as of September 30, 2023:
Amount
Years ending December 31,
(Dollars in thousands)
For the three months ending December 31, 2023
$
958
For the year ending December 31, 2024
3,569
For the year ending December 31, 2025
3,155
For the year ending December 31, 2026
2,739
For the year ending December 31, 2027
2,325
Note 7:
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 began 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 September 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 $
2.7
million will be reclassified as a decrease to net interest income 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
5.6
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.
43
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
44
and
49
swaps had an aggregate notional amount of $
350
million and $
421
million at September 30, 2023 and
December 31, 2022, respectively.
Fair Values
of Derivative Instruments on the Consolidated Statements of Financial
Condition
The table below presents the fair value of the Company’s
derivative financial instruments and their classification on the
consolidated statements of financial condition as of September
30, 2023 and December 31, 2022:
Asset Derivatives
Liability Derivatives
Statement of
Financial
Condition
September 30,
December 31,
Statement of
Financial
Condition
September 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
$
217
$
-
Interest payable
and other
liabilities
$
10,035
$
5,403
Derivatives not
designated as hedging
instruments
Other assets
and Interest
receivable
12,468
11,038
Interest payable
and other
liabilities
12,473
11,039
Total
$
12,685
$
11,038
$
22,508
$
16,442
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, 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 September 30, 2023
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Income
$
(2,333)
$
(2,333)
$
-
$
-
$
-
$
-
Interest Rate Products
Interest Expense
44
44
-
93
93
-
Total
$
(2,289)
$
(2,289)
$
-
$
93
$
93
$
-
For the Three Months Ended September 30, 2022
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Income
$
(6,891)
$
(6,891)
$
-
$
-
$
-
$
-
Interest Rate Products
Interest Expense
(185)
(185)
-
-
-
-
Total
$
(7,076)
$
(7,076)
$
-
$
-
$
-
$
-
44
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 Nine Months Ended September 30, 2023
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Income
$
(4,632)
$
(4,632)
$
-
$
-
$
-
$
-
Interest Rate Products
Interest Expense
251
251
-
102
102
-
Total
$
(4,381)
$
(4,381)
$
-
$
102
$
102
$
-
For the Nine Months Ended September 30, 2022
Derivatives in Cash Flow Hedging Relationships:
Interest Rate Products
Interest Income
$
(6,891)
$
(6,891)
$
-
$
-
$
-
$
-
Interest Rate Products
Interest Expense
3,855
3,855
-
-
-
-
Total
$
(3,036)
$
(3,036)
$
-
$
-
$
-
$
-
As of September 30, 2023 and December 31, 2022, the Company had
minimum collateral thresholds with certain of its derivative
counterparties and has received collateral of $
2.2
million and $
4.9
million, respectively.
Note 8:
Time Deposits and Borrowings
The scheduled maturities, excluding interest, of the Company’s
borrowings at September 30, 2023 were as follows:
September 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
$
1,612,087
$
126,478
$
1,795
$
2,833
$
460
$
-
$
1,743,653
Fed funds purchased &
repurchase agreements
1,555
-
-
-
-
-
1,555
FHLB borrowings
2,172
11,359
-
7,500
52,500
15,000
88,531
Line of credit
-
7,500
-
-
-
-
7,500
SBA secured borrowing
-
-
-
-
-
7,901
7,901
Trust preferred securities
(1)
-
-
-
-
-
1,103
1,103
$
1,615,814
$
145,337
$
1,795
$
10,333
$
52,960
$
24,004
$
1,850,243
(1)
The contract value of the trust preferred securities is $
2.6
million and is currently being accreted to the maturity date of 2035.
 
45
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
nine-month periods ended September 30, 2023 and 2022, were as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Affected Line Item in the
2023
2022
2023
2022
Statements of Operations
(Dollars in thousands)
Realized (losses) gains on available-for-sale
securities
$
(60)
$
(4)
$
3
$
(43)
Other non-interest income
Less: tax (benefit) expense effect
(14)
(1)
1
(11)
Income tax expense
Realized (losses) gains on available-for-sale
securities, net of income tax
(46)
(3)
2
(32)
Interest income on cash flow hedges
$
93
$
-
$
102
$
-
Interest expense - Deposits
Less: tax expense effect
22
-
24
-
Income tax expense
Interest income on cash flow hedges, net of
tax
$
71
$
-
$
78
$
-
Total reclassified amount
$
25
$
(3)
$
80
$
(32)
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 September 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.
46
The Company’s and the Bank’s
actual capital amounts and ratios as of September 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)
September 30, 2023
Total Capital to Risk-Weighted Assets
Consolidated
$
783,978
10.9
%
N/A
N/A
$
755,561
10.5
%
Bank
786,328
10.9
$
719,146
10.0
%
755,104
10.5
Tier I Capital to Risk-Weighted Assets
Consolidated
706,889
9.8
N/A
N/A
611,645
8.5
Bank
709,239
9.9
545,317
8.0
611,274
8.5
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
698,036
9.7
N/A
N/A
503,708
7.0
Bank
709,239
9.9
467,445
6.5
503,402
7.0
Tier I Capital to Average Assets
Consolidated
706,889
9.9
N/A
N/A
286,589
4.0
Bank
$
709,239
9.9
%
$
358,262
5.0
%
$
286,610
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. The aggregate number of
shares authorized for future issuance under the Omnibus Plan is
1,328,538
shares as of September 30, 2023.
47
The table below summarizes the stock-based compensation for the three- and nine-months-ended
September 30, 2023 and 2022:
Three Months Ended
Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
(Dollars in thousands)
Stock appreciation rights
$
27
$
75
$
168
$
262
Performance-based stock awards
305
200
839
611
Restricted stock units and awards
807
763
2,575
2,336
Employee stock purchase plan
69
31
129
95
Total stock-based compensation
$
1,208
$
1,069
$
3,711
$
3,304
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 nine-month period ended September 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
(7,227)
14.90
Unvested, September 30, 2023
234,328
$
14.38
Unrecognized stock-based compensation related to the performance awards issued through
September 30, 2023 was $
2.1
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
.
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
(226,721)
13.60
Forfeited
(44,620)
14.33
Unvested, September 30, 2023
479,618
$
13.62
48
Unrecognized stock-based compensation related to the RSUs and RSAs issued through September
30, 2023 was $
4.8
million and
is expected to be recognized over
1.9
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 nine-month period ended September 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
September 30, 2023.
Note 13:
Stockholders’ Equity
The following table presents the computation of basic and diluted earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
(Dollars in thousands except per share data)
Earnings per Common Share
Net Income
$
16,863
$
17,280
$
49,018
$
49,653
Less: preferred stock dividends
155
-
258
-
Net income available to common stockholders
$
16,708
$
17,280
$
48,760
$
49,653
Weighted average common shares
49,214,653
49,266,811
48,867,144
49,755,184
Earnings per common share
$
0.34
$
0.35
$
1.00
$
1.00
Diluted Earnings per Common Share
Net Income
$
16,863
$
17,280
$
49,018
$
49,653
Less: preferred stock dividends
155
-
258
-
Net income available to common stockholders
$
16,708
$
17,280
$
48,760
$
49,653
Weighted average common shares
49,214,653
49,266,811
48,867,144
49,755,184
Effect of dilutive shares
265,454
454,682
317,666
525,409
Weighted average dilutive common shares
49,480,107
49,721,493
49,184,810
50,280,593
Diluted earnings per common share
$
0.34
$
0.35
$
0.99
$
0.99
Stock-based awards not included because to do so would be
antidilutive
881,351
529,336
914,519
334,725
Dividends of $
155
thousand and $
258
thousand related to the Series A
Non-Cumulative Perpetual Preferred Stock were declared
and paid during the three- and nine-months ended September 30, 2023, respectively.
In October 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
December
15, 2023
to shareholders of record as of
November 30, 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.
49
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 September 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 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 7:
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, 2023 and
December 31, 2022:
September 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
$
17,651
$
-
$
-
$
17,651
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
50
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, 2023 and December 31, 2022:
September 30, 2023
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
$
Market comparable
properties
Marketability
discount
0
%
-
50
%
Collateral dependent loans
17,651
(
17
)%
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
)%
51
The following tables present the estimated fair values of the Company’s
financial instruments at September 30, 2023 and
December 31, 2022:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Table of Contents
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:
2023
For the Three Months Ended September 30, 2022Carrying
CommercialFair Value Measurements
and IndustrialAmount
CommercialLevel 1
andLevel 2
Industrial
Lines of
Credit
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
Real Estate
Multifamily
Real Estate
Consumer
TotalLevel 3
(Dollars in thousands)
Allowance for Credit Losses:Financial Assets
Beginning balanceCash and cash equivalents
$
10,920233,191
$
11,267
$
6,428
$
17,042
$
3,918
$
3,134
$
2,427
$
681
$
55,817
Charge-offs
-
(2,000)
(642)
-
-
-
-
-
(2,642)
Recoveries
-
9
-
748
-
-
-
9
766
Provision (credit)
417
2,781
(958)
(1,335)
669
103
246
-
1,923
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
$
63233,191
$
-
$
470-
Available-for-sale securities
750,487
-
750,487
-
Loans, net of allowance for credit losses
5,874,197
-
-
5,820,212
Restricted equity securities
4,396
-
-
4,396
Interest receivable
35,814
-
35,814
-
Equity securities
5,202
-
-
5,202
Derivative assets
12,315
-
12,315
-
Financial Liabilities
Deposits
$
6576,331,621
$
4,016
$
4
$
109
$
1
$
5,320
Provision (credit)
34
-
78
19
1,304
(2)
(25)
3
1,411
Ending balance
$
971,028,974
$
-
$
5485,301,120
Federal Home Loan Bank advances
88,531
-
81,569
-
Other borrowings
18,059
-
18,630
-
Interest payable
17,885
-
17,885
-
Derivative liabilities
22,198
-
22,198
-
December 31, 2022
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
676300,138
$
5,320300,138
$
2-
$
84-
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
$
45,651,308
$
6,7311,400,260
$
-
$
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
-
52
Note 15:
Commitments and Credit Risk
Commitments
The Company had the following commitments at September 30,
2023 and December 31, 2022:
September 30, 2023
December 31, 2022
(Dollars in thousands)
Commitments to originate loans
$
141,208
$
134,961
Standby letters of credit
72,056
66,889
Lines of credit
2,156,380
2,705,730
Future lease commitments
5,833
1,888
Commitments related to investment funds
4,798
3,403
$
2,380,275
$
2,912,871
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
53
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 nine-months ended September 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.
Performance Measures
As of or For the Quarter Ended
As of or For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2023
2023
2023
2022
2022
2023
2022
Return on average assets
(1)
0.94
%
0.93
%
0.97
%
0.77
%
1.19
%
0.95
%
1.18
%
Adjusted return on average
assets
(1)(2)
1.04
%
1.00
%
1.04
%
1.15
%
1.19
%
1.03
%
1.21
%
Return on average common
equity
(1)
10.19
%
10.00
%
10.54
%
8.04
%
11.18
%
10.24
%
10.59
%
Adjusted return on average
common equity
(1)(2)
11.26
%
10.81
%
11.30
%
12.03
%
11.22
%
11.12
%
10.82
%
Earnings per common share - basic
$
0.34
$
0.33
$
0.33
$
0.25
$
0.35
$
1.00
$
1.00
Earnings per common share -
diluted
$
0.34
$
0.33
$
0.33
$
0.24
$
0.35
$
0.99
$
0.99
Adjusted earnings per common
share - diluted
(1)
$
0.37
$
0.35
$
0.35
$
0.36
$
0.35
$
1.08
$
1.01
Efficiency ratio
(3)
59.49
%
62.02
%
60.81
%
62.40
%
53.20
%
60.77
%
55.97
%
Adjusted efficiency ratio -
FTE
(2)(3)(4)
55.17
%
57.27
%
56.42
%
55.01
%
52.25
%
56.28
%
54.21
%
Ratio of equity to assets
8.96
%
9.15
%
9.36
%
9.22
%
9.93
%
8.96
%
9.93
%
(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%
Third Quarter 2023 Highlights
During the third quarter ended September 30, 2023, we accomplished the following:
●
Improved profitability as operating revenue, adjusted diluted earnings per common share
(1)
, and adjusted return on average
common equity
(1)
 
increased compared to the prior quarter and the prior year third quarter; year-to-date
 
2023 operating
revenue grew 21% compared to the prior year
●
Completed the previously-announced acquisition of Canyon Bancorporation,
 
Inc. and its wholly owned subsidiary, Canyon
Community Bank, N.A. (the “Tucson acquisition”)
o
Added $106 million of loans net of $5.2 million in acquired loan marks, $165
 
million of deposits and $4.5 million of
core deposit intangible
o
Deepened our Arizona franchise; system integration planned for the fourth quarter of 2023
●
Loans grew $149 million, or 2.6%, for the quarter and grew 10.7% year-to date
o
Excluding the Tucson acquisition, loans grew 0.8% for the quarter and 8.7% year-to-date
●
Deposits grew $232 million, or 3.8%, for the quarter and grew 12.0%
 
year-to-date
o
Excluding the Tucson acquisition, deposits grew 1.1% for the quarter and 9.1% year-to-date
o
Non-interest-bearing deposits increased 11% from the prior quarter,
 
and increased 6% excluding the impact of the
Tucson acquisition
 
 
 
Notes
54
●
Non-performing assets increased to Condensed Consolidated Financial Statements (unaudited)0.50% of total assets but were contained within a
few relationships of manageable size;
31Net charge-offs of $1.3 million were previously reserved and represented an annualized
rate of 0.09% of average loans
●
ForReduced non-interest expense compared to the Nine Months Ended September 30, 2022linked quarter,
Commercial and
Industrialprogressing towards our longer-term efficiency goal
(1)
Commercial
and
Industrial
Lines of
Credit
(1)
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
Real
Estate
(2)
Multifamily
Real
Estate
(2)
Consumer
Total
(Dollars in thousands)
Allowance for Credit Losses:
Beginning balance, prior to
adoption of ASU 2016-13
$
20,352
$
-
$
9,229
$
19,119
$
3,749
$
5,598
$
-
$
328
$
58,375
Impact of ASU 2016-13
adoption
(10,213)
8,866
(39)
(186)
(83)
(2,552)
2,465
(5)
(1,747)
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 2016-13
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Impact of ASU 2016-13
adoption
107
44
265
711
3,914
5
137
1
5,184
Provision (credit)
(10)
(44)
283
(35)
1,406
(3)
(53)
3
1,547
Ending balance
$
97
$
-
$
548
$
676
$
5,320
$
2
$
84
$
4
$
6,731
(1)
Represents a non-GAAP financial measure.
 
PriorSee “Non-GAAP Financial Measures” below
for a reconciliation of these measures.
Mergers and Acquisitions
Update
During the third quarter of 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.
System integration is expected to occur during the adoptionfourth quarter of ASU 2016-13, the Commercial and industrial and Commercial and industrial lines of credit
were consolidated under the Commercial and industrial
segment.
(2)
Prior to the adoption of ASU 2016-13, the Residential real estate and Multifamily real estate segments were consolidated
under the Residential and Multifamily Real Estate
segment.
2023.
 
 
 
 
 
Notes to Condensed Consolidated Financial Statements
(unaudited)
32
Collateral Dependent Loans:
Collateral dependent loans are loans for which the repayment is expected to be provided
substantially through the operation or
sale of the collateral and the borrower is experiencing financial difficulty. The following
table presents the amortized cost balance of
loans considered collateral dependent by loan segment and collateral type
as of September 30, 2022:
As of September 30, 2022
Loan Segment and Collateral Description
Amortized Cost of
Collateral Dependent
Loans
Related Allowance for
Credit Losses
Amortized Cost of
Collateral Dependent
Loans with no related
Allowance
(Dollars in thousands)
Commercial and Industrial
All business assets
$
2,668
$
-
$
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
-
2,489
$
20,302
$
157
$
20,145
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 the
loan rating categories is as described above. The following table presents
the credit risk profile of the Company’s loan portfolio based on
an internal rating category and portfolio segment as of December 31, 2021:
As of December 31, 2021
Pass
Special
Mention
Substandard
Performing
Substandard
Non-
performing
Doubtful
Loss
Total
(Dollars in thousands)
Commercial and
industrial
$
1,356,883
$
16,201
$
23,739
$
4,858
$
-
$
-
$
1,401,681
Energy
184,269
73,196
5,246
13,595
2,554
-
278,860
Commercial real
estate
1,172,323
86,768
11,782
10,222
-
-
1,281,095
Construction and
land development
578,758
-
-
-
-
-
578,758
Residential and
multifamily real
estate
593,847
257
6,508
204
-
-
600,816
PPP
64,805
-
-
-
-
-
64,805
Consumer
63,605
-
-
-
-
-
63,605
$
4,014,490
$
176,422
$
47,275
$
28,879
$
2,554
$
-
$
4,269,620
The following table presents the Company’s loan portfolio aging analysis of the
recorded investment in loans as of December 31,
2021:
As of December 31, 2021
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
More
Total Past
Due
Current
Total Loans
Receivable
Loans >= 90
Days and
Accruing
(Dollars in thousands)
Commercial 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
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
55
Non-GAAP Financial Measures
In addition to Condensed Consolidated Financial Statementsdisclosing financial measures determined in accordance
with U.S. generally accepted accounting principles (GAAP), the Company discloses certain
non-GAAP
(unaudited)financial measures including “tangible common stockholders’
equity,” “tangible book value per common share,”
“adjusted efficiency ratio – FTE,”
“adjusted net income,” “adjusted
46earnings 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 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 following tablesnon-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 estimated fair valuesnon-GAAP financial measures and by including a
reconciliation of the Company’simpact of the components adjusted for in the non-GAAP financial measure so that both
 
instruments at September 30, 2022measures and the individual components may be considered when
December 31, 2021:
analyzing our performance.
A reconciliation of non-GAAP financial measures to the comparable GAAP financial measures follows.
Quarter Ended
Nine Months Ended
9/30/2023
September 30, 6/30/2023
3/31/2023
12/31/2022
Carrying9/30/2022
Fair Value Measurements9/30/2023
Amount
Level 1
Level 2
Level 39/30/2022
(Dollars in thousands)thousands, except per share data)
Financial AssetsAdjusted net income:
Cash and cash equivalentsNet income (GAAP)
$
309,13516,863
$
309,13516,047
$
16,108
$
11,946
$
17,280
$
49,018
$
49,653
Add: Acquisition costs
1,328
338
1,477
3,570
81
3,143
320
Add: Acquisition - Day 1 CECL
provision
900
-
-
4,400
-
900
-
Add: Employee separation
-
1,300
-
-
-
1,300
1,063
Less: Tax effect
(1)
(468)
(344)
(310)
(2,045)
(17)
(1,122)
(290)
Adjusted net income
$
18,623
$
17,341
$
17,275
$
17,871
$
17,344
$
53,239
$
50,746
Preferred stock dividends
$
155
$
103
$
-
$
-
Available-for-sale securities
656,527
-
656,527
-
Loans, net of allowance for credit losses
4,621,782
-
-
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
$
482,727258
$
-
$Diluted weighted average common shares outstanding
-49,480,107
Available-for-sale securities48,943,325
745,96949,043,621
-49,165,578
745,96949,725,207
-49,184,810
Loans, net of allowance for loan losses50,280,593
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
-Earnings per common share – diluted (GAAP)
$
5,468,4340.34
$
482,7270.33
$
775,5090.33
$
4,190,628
Financial Liabilities
Deposits0.24
$
4,683,5970.35
$
1,163,2240.99
$
-0.99
Adjusted earnings per common share – diluted
$
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
-0.37
$
4,934,4290.35
$
1,163,2240.35
$
257,5220.36
$
3,482,218
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 loans0.35
$
353,7831.08
$
118,6511.01
Standby letters of credit(1)
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
andRepresents the amounttax impact of the loss can be reasonably estimated. If the assessment indicates
thatadjustments at 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 naturetax rate
 
of the guarantee would be disclosed.21.0%, plus permanent tax expense associated with
 
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 the
Condensed Consolidated Balance Sheets and was $
29
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
million at September 30, 2022.
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-month periods ended September
30, 2022:
For the Three Months Ended
September 30, 2022
For the Nine Months Ended
September 30, 2022
(Dollars in thousands)
Finance lease amortization of right-of-use asset
$
69
$
161
Finance lease interest on lease liability
69
115
Operating lease expense
603
1,932
Variable lease expense
297
855
Short-term lease expense
5
15
Total lease expense
$
1,043
$
3,078
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 istransactions.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
51
currently mitigated by low debt-to-equity ratios.
As of September 30, 2022, the Company did not identify any systemic issues within its
loan portfolio that would significantly affect the credit quality of the loan portfolio.
Update to Net Interest Margin Methodology
The Company modified the yield calculation on the available-for-sale
security portfolio to better conform to peer disclosures in
the first quarter of 2022. All earning-asset yields and net interest margins presented were retroactively updated
for the change in
methodology. The following changes were made:
◾
The average unrealized gain (loss) on available-for-sale securities balance was removed
from the security lines and placed in
other non-interest earning assets.
◾
The annualization method was changed from Actual/Actual to 30/360 for the security yields.
The Company believes the new calculation provides better insight into
why the security yields and net interest margin changed
period-to-period.
Impact to Yield
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
Lines Impacted
2022
2022
2022
2021
2021
2022
2021
Previous calculation
Yield on securities - taxable
2.50
%
2.77
%
2.20
%
2.11
%
1.96
%
2.41
%
1.87
%
Yield on securities - tax-exempt
(1)
3.64
3.46
3.31
3.17
3.20
3.51
3.32
Total securities yield
(1)
3.33
3.29
3.00
2.89
2.87
3.20
2.90
Yield on interest-earning assets
(1)
4.73
4.01
3.64
3.70
3.62
4.14
3.56
Net interest spread
(1)
3.50
3.51
3.25
3.22
3.16
3.42
3.06
Net interest margin
(1)
3.60
3.55
3.29
3.28
3.20
3.48
3.10
As calculated going forward
Yield on securities - taxable
2.32
2.35
2.15
2.14
2.01
2.28
1.91
Yield on securities - tax-exempt
(1)
3.37
3.36
3.35
3.35
3.43
3.36
3.52
Total securities yield
(1)
3.07
3.07
3.00
3.02
3.04
3.05
3.04
Yield on interest-earning assets
(1)
4.68
3.98
3.64
3.72
3.64
4.11
3.58
Net interest spread
(1)
3.45
3.48
3.25
3.24
3.18
3.39
3.08
Net interest margin
(1)
3.56
3.52
3.29
3.30
3.23
3.46
3.12
Change
Yield on securities - taxable
(0.18)
(0.42)
(0.05)
0.03
0.05
(0.13)
0.04
Yield on securities - tax-exempt
(1)
(0.27)
(0.10)
0.04
0.18
0.23
(0.15)
0.20
Total securities yield
(1)
(0.26)
(0.22)
-
0.13
0.17
(0.15)
0.14
Yield on interest-earning assets
(1)
(0.05)
(0.03)
-
0.02
0.02
(0.03)
0.02
Net interest spread
(1)
(0.05)
(0.03)
-
0.02
0.02
(0.03)
0.02
Net interest margin
(1)
(0.04)
%
(0.03)
%
-
%
0.02
%
0.03
%
(0.02)
%
0.02
%
(1)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are
exempt from Federal income taxes. The
incremental tax rate used is 21.0%.
Update to Customer Concentrations
As of September 30, 2022, the Company’s
top 20 customer relationships represented approximately 24% or $1.2
billion of total
deposits. The Company believes that there are sufficient
funding sources, including on-balance sheet liquid assets and wholesale deposit
options, so that an immediate reduction in these deposit balances would
not be expected to have a material, detrimental effect on the
Company’s financial position
or operations.
52
Performance Measures
As of or For the Quarter Ended
As of or For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands, except per share data)
Return on average assets
(1)
1.19
%
1.12
%
1.23
%
1.50
%
1.54
%
1.18
%
1.16
%
Return on average equity
(1)
11.18
%
10.15
%
10.44
%
12.57
%
12.92
%
10.59
%
10.24
%
Earnings per share
$
0.35
$
0.31
$
0.33
$
0.41
$
0.41
$
1.00
$
0.95
Diluted earnings per share
$
0.35
$
0.31
$
0.33
$
0.40
$
0.41
$
0.99
$
0.93
Efficiency
(2)
53.20
%
57.36
%
57.57
%
55.38
%
59.06
%
55.97
%
54.18
%
Ratio of equity to assets
9.93
%
10.65
%
11.29
%
11.88
%
12.08
%
9.93
%
12.08
%
(1)
Interim periods annualized
(2)
We calculate efficiency ratio as non-interest expense
divided by the sum of net interest income and
non-interest income.
Results of Operations
Net Interest Income
Net interest income is presented on a tax-equivalent basis below. Presentation
on a tax-equivalent basis reflects all income as taxable at the same rate. For example, $100
of
tax-exempt income would be presented as $121.00, which represents the
tax-exempt income amount plus the tax at the statutory federal income tax rate of 21%. We
believe a tax-
equivalent basis provides for improved comparability between the various
earning assets.
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Yield on securities - tax-equivalent
(1)
3.07
%
3.07
%
3.00
%
3.02
%
3.04
%
3.05
%
3.04
%
Yield on loans
5.08
4.28
4.00
4.17
4.00
4.47
3.98
Yield on earning assets - tax-equivalent
(1)
4.68
3.98
3.64
3.72
3.64
4.11
3.58
Cost of interest-bearing deposits
1.56
0.56
0.41
0.43
0.47
0.87
0.51
Cost of total deposits
1.20
0.42
0.31
0.33
0.38
0.66
0.42
Cost of FHLB and short-term borrowings
2.18
1.66
1.95
3.03
1.82
1.87
1.80
Cost of funds
1.23
0.50
0.39
0.48
0.46
0.72
0.50
Net interest margin - tax-equivalent
(1)
3.56
%
3.52
%
3.29
%
3.30
%
3.23
%
3.46
%
3.12
%
(1)
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%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5356
The following tables present, for the periods indicated, average balance
sheet information, interest income, interest expense and the corresponding
average yield and ratesQuarter Ended
paid:
ThreeNine Months Ended
September 30, 9/30/2023
6/30/2023
3/31/2023
12/31/2022
September 30, 20219/30/2022
Average Balance9/30/2023
Interest Income
/ Expense
Average Yield /
Rate
(1)
Average Balance
Interest Income
/ Expense
Average Yield /
Rate
(1)9/30/2022
(Dollars in thousands)
Interest-earningAdjusted return on average assets:
Securities - taxableNet income (GAAP)
$
213,77516,863
$
1,241
2.32
%16,047
$
191,63616,108
$
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)
5,632,34511,946
$
66,370
4.68
%
5,237,48417,280
$
48,05949,018
3.64$
%49,653
Allowance for credit lossesAdjusted net income
(56,995)18,623
(75,103)17,341
Other non-interest-earning17,275
17,871
17,344
53,239
50,746
Average assets
188,997$
246,6037,114,228
Total assets$
6,929,972
$
6,712,801
$
6,159,783
$
5,764,347
$
5,408,984
Interest-bearing liabilities
Transaction deposits6,920,471
$
531,9995,625,317
Return on average assets (GAAP)
0.94
%
0.93
%
0.97
%
0.77
%
1.19
%
0.95
%
1.18
%
Adjusted return on average assets
1.04
%
1.00
%
1.04
%
1.15
%
1.19
%
1.03
%
1.21
%
Quarter Ended
Nine Months Ended
9/30/2023
6/30/2023
3/31/2023
12/31/2022
9/30/2022
9/30/2023
9/30/2022
(Dollars in thousands)
Adjusted return on average common equity:
Net income (GAAP)
$
1,539
1.95
%16,863
$
510,82316,047
$
25916,108
0.20$
%11,946
Savings and money market deposits$
2,519,57417,280
10,568$
1.6649,018
2,276,436$
1,90749,653
0.33Preferred stock dividends
Time deposits155
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
1,137,626103
-
-
909,750-
258
-
Net income attributable to common shareholders (GAAP)
$
16,708
$
15,944
$
16,108
$
11,946
$
17,280
$
48,760
$
49,653
Adjusted net income
$
18,623
$
17,341
$
17,275
$
17,871
$
17,344
$
53,239
$
50,746
Preferred stock dividends
155
103
-
-
Cost of funds-
5,089,039258
-
Adjusted net income attributable to common shareholders
$
15,855
1.23
%
4,728,16318,468
$
5,51017,238
0.46$
%17,275
Other liabilities$
62,10217,871
36,106$
Stockholders’ equity17,344
613,206$
644,71552,981
Total liabilities and stockholders’$
50,746
Average common equity
$
5,764,347650,494
$
5,408,984639,741
$
619,952
$
589,587
$
613,206
$
636,841
$
627,016
Return on average common equity (GAAP)
10.19
%
10.00
%
10.54
%
8.04
%
11.18
%
10.24
%
10.59
%
Adjusted return on average common equity
11.26
%
10.81
%
11.30
%
12.03
%
11.22
%
11.12
%
10.82
%
Quarter Ended
9/30/2023
6/30/2023
3/31/2023
12/31/2022
9/30/2022
(Dollars in thousands, except per share data)
Tangible common stockholders' equity:
Total stockholders' equity (GAAP)
$
643,051
$
651,483
$
645,491
$
608,599
$
580,547
Less: goodwill and other intangible assets
32,293
27,457
28,259
29,081
71
Less: preferred stock
7,750
7,750
7,750
-
-
Tangible common stockholders' equity
$
603,008
$
616,276
$
609,482
$
579,518
$
580,476
Common shares outstanding at end of period
49,295,036
48,653,487
48,600,618
48,448,215
48,787,696
Book value per common share (GAAP)
$
13.04
$
13.39
$
13.28
$
12.56
$
11.90
Tangible book value per common share
$
12.23
$
12.67
$
12.54
$
11.96
$
11.90
57
Quarter Ended
Nine Months Ended
9/30/2023
6/30/2023
3/31/2023
12/31/2022
9/30/2022
9/30/2023
9/30/2022
(Dollars in thousands)
Adjusted Efficiency Ratio - FTE
(1)
Non-interest expense
$
36,354
$
37,412
$
38,092
$
36,423
$
28,451
$
111,858
$
85,319
Less: Acquisition costs
(1,328)
(338)
(1,477)
(3,570)
(81)
(3,143)
(320)
Less: Core deposit intangible amortization
(922)
(802)
(822)
(291)
-
(2,546)
-
Less: Employee separation
-
(1,300)
-
-
-
(1,300)
(1,063)
Adjusted Non-interest expense (numerator)
$
34,104
$
34,972
$
35,793
$
32,562
$
28,370
$
104,869
$
83,936
Net interest income -
55,127
54,539
58,221
54,015
49,695
167,887
139,519
Tax equivalent interest income
(1)
707
750
797
818
820
2,254
2,403
Non-interest income
5,981
5,779
4,421
4,359
3,780
16,181
12,922
Total tax-equivalent
(2) income (denominator)
$
50,51561,815
$
42,54961,068
Net interest spread - tax-equivalent$
(2)63,439
3.46$
59,192
$
54,295
$
186,322
$
154,844
Efficiency Ratio (GAAP)
59.49
%
3.1862.02
%
Net interest margin - tax-equivalent
(2)
3.5660.81
%
3.2362.40
%
53.20
%
60.77
%
55.97
%
Adjusted Efficiency Ratio - FTE
(1)
55.17
%
57.27
%
56.42
%
55.01
%
52.25
%
56.28
%
54.21
%
(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 (tax-free municipal securities)
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
58
Results of Operations
Overview
Net income include non-accrual loans of $17totaled $16.9 million, and $48 million as of September 30, 2022 and 2021, respectively.
(4)
Loan interest income includes loan fees of $3 million and $4 millionor $0.34 per diluted common share, for the three months three-months
ended September, 30, 2023 compared
to $17.3 million, or $0.35 per diluted common share, during the three-months ended
September 30, 2022.
For the nine-month periods
ending September 30, 2023 and 2022, net income totaled $49.0 million, or $0.99
per diluted common share, and 2021,$49.7 million, or $0.99
per diluted common share, respectively.
For both comparative periods, increases in net interest income and non-interest income
were
more than offset by higher non-interest expense.
The third quarter of 2023 included acquisition-related charges of $1.3
million and Day 1 CECL provision expense on acquired
loans of $0.9 million, resulting in adjusted net income
(1)
of $18.6 million, or $0.37 per diluted common share on an adjusted
basis
(1)
.
The nine-months ended September 30, 2023 included acquisition-related charges
of $3.1 million,
Day 1 CECL provision expense on
acquired loans of $0.9 million and employee separation costs of $1.3
million resulting in adjusted net income
(1)
of $53.2 million, or
$1.08 per diluted common share, on an adjusted basis
(1)
.
Return on average assets was 0.94% and 0.95% for the three- and nine-months ended
September 30, 2023, respectively.
Adjusted
return on average assets
(1)
was 1.04% and 1.03% for the same periods.
Return on average common equity was 10.19% and 10.24% for
the three- and nine-months ended September 30, 2023, respectively.
Adjusted return on average common equity
(1)
was 11.26% and
11.12% for the same periods.
(1)
Represents a non-GAAP financial measure.
See "Non-GAAP Financial Measures" above for
a reconciliation of these measures.
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
5459
NineThe 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:
Three Months Ended
September 30, 20222023
September 30, 20212022
Average
Balance
Interest Income
Income /
Expense
Average
Yield /
Rate
(1)(4)
Average
Balance
Interest Income
Income /
Expense
Average
Yield /
Rate
(1)(4)
(Dollars in thousands)
Interest-earning assets:
Securities - taxable
$
218,421357,260
$
3,7283,216
2.283.60
%
$
203,633213,775
$
2,9111,241
1.912.32
%
Securities - tax-exempt
(2)(1)
549,490489,320
13,8454,072
3.363.33
476,980560,541
12,5964,725
3.523.37
Federal funds sold
332
5
5.97
-
-
-
Interest-bearing deposits in other banks
246,213198,068
1,7142,439
0.934.89
390,588231,345
3591,193
0.122.05
Gross loans, net of unearned income
(2)(3)(4)
4,466,8875,907,730
149,266103,631
4.476.96
4,381,2134,626,684
130,26859,211
3.985.08
Total interest-earning assets - FTE
(2)(1)
5,481,0116,952,710
$
168,553113,363
4.116.47
%
5,452,4145,632,345
$
146,13466,370
3.584.68
%
Allowance for credit losses
(57,213)(69,415)
(76,726)(56,995)
Other non-interest-earning assets
201,519230,933
249,816188,997
Total assets
$
5,625,3177,114,228
$
5,625,5045,764,347
Interest-bearing liabilities
Transaction deposits
$
541,933689,973
$
2,1345,727
0.893.29
%
$
629,959531,999
$
9361,539
0.201.95
%
Savings and money market deposits
2,386,2052,775,549
15,28529,655
0.864.24
2,360,5592,519,574
6,40210,568
0.361.66
Time deposits
627,4581,795,798
5,73320,915
1.224.62
863,592733,607
7,4512,802
1.151.52
Total interest-bearing deposits
3,555,5965,261,320
23,15256,297
0.874.25
3,854,1103,785,180
14,78914,909
0.511.56
FHLB and short-term borrowings
241,897131,420
3,3851,169
1.873.53
285,371165,196
3,841907
1.802.18
Trust preferred securities, net of fair value
adjustments
1,0241,091
9463
12.2922.91
9761,037
7239
9.8014.58
Non-interest-bearing deposits
1,148,150954,005
-
-
814,9241,137,626
-
-
Cost of funds
4,946,6676,347,836
$
26,63157,529
0.723.60
%
4,955,3815,089,039
$
18,70215,855
0.501.23
%
Other liabilities
51,634108,148
35,38562,102
Stockholders’
equity
627,016658,244
634,738613,206
Total liabilities and stockholders’ equity
$
5,625,3177,114,228
$
5,625,5045,764,347
Net interest income - tax-equivalentFTE
(2)(1)
$
141,92255,834
$
127,43250,515
Net interest spread - tax-equivalentFTE
(2)(1)
3.392.87
%
3.083.46
%
Net interest margin - tax-equivalentFTE
(2)(1)
3.463.19
%
3.123.56
%
(1)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax
rate used is 21.0%.
(2)
Loans, net of unearned income include non-accrual loans of $20
million and $17 million as of September 30, 2023 and 2022, respectively.
(3)
Loan interest income includes loan fees of $3 million for the three-months ended September 30, 2023 and 2022.
(4)
Actual unrounded values are used to calculate the reported yield or rate. Accordingly, recalculations using the amounts in thousands as disclosed in this
report may not produce the same amounts.
(2)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%.
(3)
Loans, net of unearned income include non-accrual loans of $17 million and $48 million as of September 30, 2022 and 2021, respectively.
(4)
Loan interest income includes loan fees of $10 million and $13 million for the nine months ended September 30, 2022 and 2021, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
55
Changes in interest income and interest expense result from changes in average
balances (volume) of interest earning assets and interest-bearing
liabilities, as well as changes
in average interest rates. The following table sets forth the effects of changing rates and volumes
on our net interest income during the periods shown. Information is provided
with
respect to: (i) changes in volume (change in volume times old rate); (ii) changes
in rates (change in rate times old volume); and (iii) changes in rate/volume (change
in rate times the
change in volume).
Three Months Ended
Nine Months Ended
September 30, 2022 over 2021
September 30, 2022 over 2021
Average Volume
Yield/Rate
Net Change
(1)
Average Volume
Yield/Rate
Net Change
(1)
(Dollars in thousands)
Interest Income
Securities - taxable
$
119
$
158
$
277
$
222
$
595
$
817
Securities - tax-exempt
(2)
501
(86)
415
1,840
(591)
1,249
Interest-bearing deposits in other banks
(39)
1,111
1,072
(176)
1,531
1,355
Gross loans, net of unearned income
4,251
12,296
16,547
2,604
16,394
18,998
Total interest income
(2)
$
4,832
$
13,479
$
18,311
$
4,490
$
17,929
$
22,419
Interest Expense
Transaction deposits
$
5
$
1,275
$
1,280
$
(207)
$
1,405
$
1,198
Savings and money market deposits
223
8,438
8,661
69
8,814
8,883
Time deposits
(49)
806
757
(2,145)
427
(1,718)
Total interest-bearing deposits
179
10,519
10,698
(2,283)
10,646
8,363
FHLB and short-term borrowings
(583)
215
(368)
(601)
145
(456)
Trust preferred securities, net of fair value adjustments
1
14
15
4
18
22
Total interest expense
(403)
10,748
10,345
(2,880)
10,809
7,929
Net interest income
(2)
$
5,235
$
2,731
$
7,966
$
7,370
$
7,120
$
14,490
(1)
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.
(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%.
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 loans
outstanding and higher interest rates. The yield on taxable securities benefited from a slowdown
in mortgage-backed securities (“MBS”) prepayments
that reduced the premium
amortization on MBS by $0.2 million and $0.7 million for the three-
and nine-month periods ended September 30, 2022, respectively.
The loan yield for the three-month period
ended September 30, 2022, benefited from $1.0 million in interest income
related to recoveries of interest income and loans placed back on accrual status.
Loan yields for the three-
and nine-month periods ended September 30, 2022 compared to the corresponding
periods in 2021 were partially offset by lower PPP loan fees of $1.5 million and $4.8 million,
respectively.
Average earning assets totaled $5.6
billion for the three-month period ended September 30, 2022 and $5.5 billion
for the nine-month period ended September 30, 2022, resulting in
increases of $395 million or 8% and $29 million or 1%, respectively compared
to the same periods in 2021. The increases were driven by higher average gross loans
,
average taxable
56
securities,
and average tax-exempt securities, partially offset by a reduction
in average interest-bearing deposits in other banks for the three-
and nine-month periods ended
September 30, 2022 compared to the corresponding periods in 2021.
Interest expense
- 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 Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands)
Total non-interest income (expense)
$
3,780
$
4,201
$
4,942
$
4,796
$
(1,105)
$
12,922
$
8,864
Non-interest income (expense) to average assets
(1)
0.26
%
0.30
%
0.36
%
0.34
%
(0.08)
%
0.31
%
0.21
%
(1)
Interim periods annualized.
57
The components of non-interest income were as follows for the periods
shown:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Change
Change
2022
2021
$
%
2022
2021
$
%
(Dollars in thousands)
Service charges and fees on customer accounts
$
1,566
$
1,196
$
370
31
%
$
4,520
$
3,330
$
1,190
36
%
Realized gains (losses) on available-for-sale securities
(4)
1,046
(1,050)
NM
(43)
1,043
(1,086)
NM
Unrealized gains (losses), net on equity securities
(87)
(6,210)
6,123
(99)
(261)
(6,243)
5,982
(96)
Income from bank-owned life insurance
405
427
(22)
(5)
1,200
3,088
(1,888)
(61)
Swap fees and credit valuation adjustments, net
(7)
31
(38)
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).
61
Loan Portfolio
Refer to “Note 4: Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (unaudited)
for additional information
regarding the Company’s loan portfolio. As of September 30, 2022, gross loans, net of unearned fees increased
$421 million or 10% from December 31, 2021
and was driven by the
following:
Commercial and Industrial Lines of Credit
- 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, 2022
Due in One Year or Less
Due in One Year through
Five Years
Due in Five Year through
Fifteen Years
Due after Fifteen Years
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Total
(Dollars in thousands)
Commercial and industrial
$
25,889
$
44,014
$
268,276
$
381,009
$
53,496
$
65,483
$
19,669
$
-
$
857,836
Commercial and industrial
lines of credit
48,030
307,620
16,237
443,233
10,414
5,653
-
-
831,187
Energy
8
40,172
9,448
129,227
-
-
-
-
178,855
Commercial real estate
34,313
193,897
427,932
348,355
181,577
199,339
-
14,925
1,400,338
Construction and land
development
22,434
54,461
73,783
442,656
24,426
16,448
1,637
38,196
674,041
Residential real estate
2,673
270
11,764
3,008
86,286
2,401
882
286,583
393,867
Multifamily real estate
21,416
70,755
44,286
127,202
4,967
7,169
-
-
275,795
Consumer
4,779
14,971
13,719
7,612
-
23,115
-
1,531
65,727
Total
$
159,542
$
726,160
$
865,445
$
1,882,302
$
361,166
$
319,608
$
22,188
$
341,235
$
4,677,646
62
Provision and Allowance for
Credit Losses
The Company implemented the CECL model as of January 1, 2022. Refer to “Note 1: Nature of Operations and
Summary of Significant Accounting Policies” and “Note 4:
Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (unaudited)
for details regarding the transition, including the impact to
the financial statements. The CECL model compared to the incurred loss model may accelerate the provision for
credit losses if the Company’s loan portfolio continues to grow. In
addition, positive (negative) forward-looking indicators may decrease
(increase) the required provision for credit losses.
The ACL at September 30, 2022 represents our best estimate of the expected credit losses in the Company’s loan portfolio and off-balance sheet
commitments, measured over
the contractual life of the underlying instrument.
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
(Dollars in thousands)
Provision for credit losses
(1)
- 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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6360
September 30, Nine Months Ended
2023
2022
January 1, 2022
ACL
Amount
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
ACL
Amount
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
Loans
Off-Average
Balance
SheetInterest
TotalIncome /
LoansExpense
Off-Average
Yield /
Rate
(4)
Average
Balance
SheetInterest
TotalIncome /
Expense
Average
Yield /
Rate
(4)
(Dollars in thousands)
Commercial and industrialInterest-earning assets:
Securities - taxable
$
11,337321,128
$
978,313
$
11,434
18
%
183.45
%
$
10,139218,421
$
1073,728
2.28
%
Securities - tax-exempt - FTE
(1)
514,333
12,984
3.37
549,490
13,845
3.36
Federal funds sold
691
11
2.13
-
-
-
Interest-bearing deposits in other banks
179,649
6,056
4.51
246,213
1,714
0.93
Gross loans, net of unearned income
(2)(3)
5,742,621
292,231
6.80
4,466,887
149,266
4.47
Total interest-earning assets - FTE
(1)
6,758,422
$
10,246319,595
176.32
%
205,481,011
$
168,553
4.11
%
Commercial and industrialAllowance for credit losses
lines of credit(66,265)
12,057(57,213)
-Other non-interest-earning assets
12,057228,314
19
18
8,866
44
8,910
14
14
Energy
4,828
548
5,376
9
4
9,190
265
9,455
15
7
Commercial real estate
16,455
676
17,131
28
31
18,933
711
19,644
32
30
Construction and land
development
4,587
5,320
9,907
16
14
3,666
3,914
7,580
12
14
Residential real estate
3,237
2
3,239
5
8
3,046
5
3,051
5
8
Multifamily real estate
2,673
84
2,757
4
6
2,465
137
2,602
4
6
Consumer
690
4
694
1
1
323
1
324
1
1201,519
Total assets
$
55,8646,920,471
$
6,7315,625,317
Interest-bearing liabilities
Transaction deposits
$
62,595610,869
100$
%13,566
1002.97
%
$
56,628541,933
$
5,1842,134
0.89
%
Savings and money market deposits
2,787,915
80,151
3.84
2,386,205
15,285
0.86
Time deposits
1,505,329
47,968
4.26
627,458
5,733
1.22
Total interest-bearing deposits
4,904,113
141,685
3.86
3,555,596
23,152
0.87
FHLB and short-term borrowings
250,795
7,593
4.05
241,897
3,385
1.87
Trust preferred securities, net of fair value
adjustments
1,077
176
21.85
1,024
94
12.29
Non-interest-bearing deposits
1,022,469
-
-
1,148,150
-
-
Cost of funds
6,178,454
$
61,812149,454
1003.23
%
1004,946,667
$
26,631
0.72
%
Refer to “Note 4: Loans and Allowance for Credit Losses” within the Notes to Condensed Consolidated Financial Statements (unaOther liabilities
99,896
51,634
Stockholders’
 
udited)equity
642,121
627,016
Total liabilities and stockholders’ equity
$
6,920,471
$
5,625,317
Net interest income - FTE
(1)
$
170,141
$
141,922
Net interest spread - FTE
(1)
3.09
%
3.39
%
Net interest margin - FTE
(1)
3.36
%
3.46
%
(1)
Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax
rate used is 21.0%.
(2)
Loans, net of unearned income include non-accrual loans of
$20 million and $17 million as of September 30, 2023 and 2022, respectively.
(3)
Loan interest income includes loan fees of $10 million 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
nine-months ended September 30, 2022,2023 and 2022.
(4)
Actual unrounded values are used to calculate the impaired loan reserve decreased $0.1 million and
$5.6 million, respectively.
The decrease was primarilyreported yield or rate. Accordingly, recalculations using the amounts in thousands as disclosed in this
due to a restructured commercial loan relationship in which addition
al collateral was obtained. Forreport may not produce the nine-month period ended September
30, 2022, the change included a
commercial real estate loan with an improved collateral valuation that resulted
in a $2 million reduction in the required reserve, a $0.6 million decline related to a
commercial real
estate loan charged down and subsequently paid off, and two energy
loans that paid down their outstanding balance, resulting in a $1 million decrease to the required
reserve and one
energy loan that was charged down,
resulting in a $1 million decrease in the required reserve.
Charge-offs and Recoveries:
Net charge-offs were $2 million and $4 million for the three- and nine-month periods
ended September 30, 2022, respectively. For the three-month period
ended September
30, 2022 charge-offs included $0.6 million related to two collateral-dependent
energy loans and $2.0 million related to a collateral-dependent commercial and industrial
line of credit
loan. Recoveries
primarily included $0.8 million related to a commercial real estate loan charged-off
earlier in 2022.
For the nine-month period ended September 30, 2022, charge-offs
also included $2.0 million related to a collateral-dependent commercial
and industrial line of credit that
originated in 2018 and started to deteriorate at the end of 2021; a $1 million
charge-off related to an energy loan originated in 2016 that was significantly impacted by
lower oil
prices over the past few years;
a $0.8 million charge-off on a commercial real estate project that originated
in 2017 and started to deteriorate in 2020; $2.9 million related to two
collateral-dependent energy loans; $0.6 million related to a commercial and
industrial SBA loan originated in 2018; and $0.2 million related to a junior lien on a residential real estatesame amounts.
 
 
 
64
loan. Charge-offs were partially offset primarily by a $1.8 million recovery
on an energy loan that was charged-off in 2020, $1.6 million related to a commercial real estate loan
charged-off in 2020 and $1.7 million related to a commercial and industrial line
of credit charged-off in 2020.
During the three months ended September 30, 2021, charge
-offs primarily related to one commercial loan and one energy loan. The energy charge-off related to
the sale of
collateral from a borrower that filed for bankruptcy in a previous year. Approximately $2 million remained on the energy
loan at September 30, 2021. Recoveries totaled $0.2 million
for the three months ended September 30, 2021 primarily from a commercial loan
that was previously charged-off in 2020.
During the three months ended June 30, 2021, charge-offs primarily related
to a commercial and industrial borrower. The $3 million charged-off was greater than the reserved
balance in the Allowance for Loan and Lease Loss at December 31, 2020 resulting in a $2 million increase in the provision during
the three- and six-month periods ended June 30,
2021.
During the three-months ended March 31, 2021, charge-offs primarily
related to two commercial and industrial borrowers that were unable to support their debt obligations.
The $8 million charged-off was greater than the reserved balance in the allowance
for loan losses at December 31, 2020 resulting in a $5 million increase in the provision
during the
quarter ended March 31, 2021.
The below table provides the ratio of net charge-offs (recoveries) to average
loans outstanding based on our loan categories for the periods indicated:
For the Quarter Ended
For the Nine Months Ended
September 30,
June 30,
March 31,
December 31,
September 30,
September 30,
September 30,
2022
2022
2022
2021
2021
2022
2021
Commercial and industrial
-
%
0.28
%
(0.27)
%
0.27
%
0.04
%
0.01
%
0.02
%
Commercial and industrial lines of credit
1.10
(0.56)
0.76
0.04
0.62
0.36
3.12
Energy
1.19
4.77
(1.02)
0.68
0.64
1.64
0.22
Commercial real estate
(0.21)
(0.45)
0.34
-
-
(0.12)
-
Construction and land development
-
-
-
-
-
-
-
Residential real estate
-
0.21
-
(0.32)
-
0.07
-
Multifamily real estate
-
-
-
(0.06)
(0.01)
-
-
Consumer
(0.05)
-
0.05
(0.01)
(0.03)
-
0.06
Total net charge-offs to average loans
0.16
%
0.10
%
0.10
%
0.07
%
0.13
%
0.12
%
0.37
%
Non-performing Assets and
Other Asset Quality Metrics
Non-performing assets include: (i) non-performing loans - includes
non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified
under
TDRs that are not performing in accordance with their modified terms; (ii) foreclosed
assets held for sale; (iii) repossessed assets; and (iv) impaired debt securities.
Non-performing assets decreased to $18 million as of September
30, 2022 due to an $11 million decrease
in non-accrual loans and a $2 million decrease in loans past due 90
days or more and still accruing interest. The decline in non-accrual loans was driven by $4 million
in loans returned to accruing status, $3 million in charge-offs on non-accrual
loans,
and $3 million in non-accrual loans that paid off. Improvements in
credit metrics continue to be driven by upgrades in COVID-19 impacted segments and
the energy portfolio.
Non-performing assets decreased to $31 million as of June 30, 2022
due to a $5 million decrease in non-accrual loans. The decline was driven by $4 million in charge-offs on
non-accrual loans. Improvements in credit metrics were driven by upgrades
in COVID-19 impacted segments and the energy portfolio.
65
Non-performing assets increased slightly to $36 million or 0.64% of total
assets as of March 31, 2022
primarily due to an $11 million, previously identified substandard
commercial and industrial line of credit. The increase was partially offset by a $7 million
decline in non-accrual energy loans due to $1 million in charge-offs, $3 million
in payoffs
and $3 million in loans placed back on accrual status. As of March 31, 2022, 25% of non-performing assets remained
in the energy sector.
During 2021, non-performing assets continued to decrease due primarily
to upgrades and pay offs in the commercial and industrial and energy portfolios. As of December 31,
2021, 49% of non-performing assets related to energy credits that were
significantly impacted by lower oil prices over previous few years.
Credit quality metrics were generally improved during the third quarter of 2022,
reflecting overall improvement from the prior quarter and significant improvement
over the
prior year.
The table below summarizes our non-performing assets and related ratios as of
the dates indicated:
For the Quarter Ended
September 30,
June 30,
March 31,
December 31,
September 30,
2022
2022
2022
2021
2021
(Dollars in thousands)
Non-accrual loans
$
16,923
$
27,698
$
33,071
$
31,432
$
48,147
Loans past due 90 days or more and still accruing
303
2,163
1,534
90
342
Total non-performing loans
17,226
29,861
34,605
31,522
48,489
Foreclosed assets held for sale
973
973
973
1,148
1,148
Total non-performing assets
$
18,199
$
30,834
$
35,578
$
32,670
$
49,637
ACL to total loans
1.19
%
1.23
%
1.27
%
1.37
%
1.51
%
ACL + ACL
on off-balance sheet to total loans
(1)
1.34
1.35
1.38
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:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
61
Net interest income
-
Net interest income increased $5.4 million and $28.4 million and net interest income
- FTE increased $5.3 million
and $28.2 million for the three-
and nine-month periods
ended September 30, 2023 compared to the same periods
in 2022,
respectively.
Compared to the third quarter of 2022,
net interest margin - FTE for the third quarter of 2023 decreased 37 basis points.
For the nine-
months ended September 30, 2023 compared to the same period in 2022, net interest
margin - FTE decreased 10 basis points.
Average earning assets totaled $7.0 billion for the three-month period
ended September 30, 2023 and $6.8
billion for the nine-month
period ended September 30, 2023, resulting in increases
of $1.3
billion for both periods,
compared to the same periods
in 2022,
inclusive of the impact of the acquisition of Farmers & Stockmens Bank (the
“Colorado/New Mexico acquisition”) and the Tucson
acquisition. The increases were driven by higher average loan and investment portfolio balances, partially
offset by lower average cash
balances for the three- and nine-month periods
ended September 30, 2023 compared to the corresponding periods
in 2022.
The FTE yield on earning assets increased 1.79%
from the third quarter of 2022 to the third quarter of 2023 and increased 2.21% for
the
nine-months ended September 30, 2023, compared to the same period in 2022 due to new loan production
as well as repricing of
variable rate loans, partially offset by the impact of non-accrual loan interest reversals.
The cost of funds increased 2.37% and 2.51%
over the same periods
due to pricing pressure on interest-bearing deposits from the higher interest rate environmen
t
as well as client
migration into higher cost deposit products compared to the prior year.
The Company currently anticipates net interest margin - FTE to be in a range of 3.20%
to 3.25% for the fourth quarter of 2023.
Provision
For the Three Months Ended
For the Nine Months Ended
September 30,
September 30,
2023
2022
2023
2022
(Dollars in thousands)
Provision for credit losses - loans
$
4,929
$
1,923
$
12,965
$
3,297
Provision for credit losses - off-balance sheet
(1,600)
1,411
(2,575)
1,547
Total provision for credit losses
$
3,329
$
3,334
$
10,390
$
4,844
Provision expense of $3.3 million for the third quarter of 2023 was consistent with the same
period in 2022.
For the nine-months
ended September 30, 2023 provision expense of $10.4 million increased $5.5
million compared to the same period in 2022.
Increases
due to loan growth, changes in credit quality, economic factors, an increase in specific reserves
and $0.9 million of Day 1 CECL
provision expense related to the Tucson acquisition were partially offset by a decrease related
to the decrease in unfunded commitments.
Non-Interest Income
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
2023
2022
$
%
2023
2022
$
%
(Dollars in thousands)
Service charges and fees on customer
accounts
$
2,249
$
1,566
$
683
44
%
$
6,188
$
4,520
$
1,668
37
%
ATM and credit card interchange income
1,436
1,326
110
8
3,913
5,513
(1,600)
(29)
Gain on sale of loans
739
-
739
NM
2,131
-
2,131
NM
Income from bank-owned life insurance
437
405
32
8
1,266
1,200
66
6
Swap fees and credit valuation adjustments,
net
57
(7)
64
NM
231
123
108
88
Other non-interest income
1,063
490
573
117
2,452
1,566
886
57
Total non-interest income
$
5,981
$
3,780
$
2,201
58
%
$
16,181
$
12,922
$
3,259
25
%
The changes in non-interest income were driven primarily by the following:
62
Service charges and fees on customer accounts
- The increases for the three- and nine-month periods
ended September 30, 2023
compared to the corresponding periods in 2022 were driven primarily by increases 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 increase in ATM and credit card interchange income for the three-months ended
September 30, 2023 compared to the three-months ended September 30,
2022 was primarily due to increases in ATM fee income due to
higher transaction volume. The decrease in ATM and credit card interchange income for the nine-months ended September 30, 2023
compared to the same period in 2022 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 current year,
partially offset by increases in ATM fee income.
Gain on sale of loans
– The increases
for the three-
and nine-month periods ended September 30, 2023 compared to
the same periods
for 2022 were due to mortgage and SBA loan sale activity in 2023.
Our SBA lending team is a specialty lending vertical we augmented
from the Colorado/New Mexico acquisition in the fourth quarter of 2022.
Other non-interest income
– The increases for the three-
and nine-month periods ended September 30, 2023 compared to the same
periods for 2022 were due to stronger client-related transactional income and an increase
in gains on equity securities.
Non-Interest Expense
The components of non-interest expense were as follows for the periods
indicated:
Quarter Ended
Nine Months Ended
September 30,
September 30,
Change
Change
2023
2022
$
%
2023
2022
$
%
(Dollars in thousands)
Salaries and employee benefits
$
22,017
$
18,252
$
3,765
21
%
$
68,700
$
53,288
$
15,412
29
%
Occupancy
3,183
2,736
447
16
9,211
7,851
1,360
17
Professional fees
1,945
580
1,365
235
5,533
2,453
3,080
126
Deposit insurance premiums
1,947
903
1,044
116
5,359
2,355
3,004
128
Data processing
904
877
27
3
3,203
2,849
354
12
Advertising
593
796
(203)
(26)
1,994
2,247
(253)
(11)
Software and communication
1,898
1,222
676
55
5,204
3,689
1,515
41
Foreclosed assets, net
-
9
(9)
(100)
128
(30)
158
NM
Other non-interest expense
2,945
3,057
(112)
(4)
9,980
10,559
(579)
(5)
Core deposit intangible amortization
922
19
903
4,753
2,546
58
2,488
4,290
Total non-interest expense
$
36,354
$
28,451
$
7,903
28
%
$
111,858
$
85,319
$
26,539
31
%
Non-interest expense increased $7.9 million and $26.5 million for the three-
and nine-month periods
ended September 30, 2023
compared to the same periods
in 2022.
The third quarter of 2023 included $1.3 million of acquisition-related expenses,
with $0.8 million
included in professional fees, $0.3 million in salaries and employee benefits, $0.1
million in software and communication, and $0.1
million in other non-interest expense.
The nine-months ended September 30, 2023 included $3.1 million of acquisition
-related
expenses, most of which were included in professional fees and salaries and
employee benefits, and $1.3 million of employee separation
costs included in salaries and employee benefits. The three-month period ended September
30, 2022 included $0.1
million of
acquisition-related expenses, most of which were included in professional
fees. The nine-months ended September 30, 2022 included
$0.3
million of acquisition-related expenses, most of which were included in professional fees, and $1.
1
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 nine-months ended September 30, 2023 as compared to the same periods in
the prior year, excluding the employee separation costs in 2023 previously
mentioned, increases were primarily due to the addition of
employees from the Colorado/New Mexico acquisition and the Tucson
acquisition,
hiring in new markets and merit increases.
Occupancy
– For both comparative periods,
the increases in occupancy costs were driven by the addition of a second location in Dallas,
Texas as well as the additional
occupancy cost from acquired locations in Colorado,
New Mexico and Tucson.
63
Professional Fees
– Professional fees for both the three-
and nine-months ended September 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 nine-months ended September 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 nine-months ended September 30, 2023 as compared to the same period in the prior year, the
decrease for employee separation costs was partially offset by increased post-pandemic
travel expenses and transaction fraud-related
losses.
Core Deposit Intangible Amortization
– For both the three-
and nine-months ended September 30, 2023 as compared to the same
periods in the prior year, increases
were due to expense related to the Colorado/New Mexico acquisition and the Tucson
acquisition.
We currently anticipate non-interest expense to be in a range of $34 to $35 million
for the fourth quarter of 2023. The efficiency
ratios were 59.49% and 60.77% and the adjusted efficiency ratios – FTE
(1)
were 55.17% and 56.28% for the three- and nine-month
periods ended September 30, 2023,
respectively.
(1)
Represents a non-GAAP financial measure.
See "Non-GAAP Financial Measures"
above for a reconciliation of these measures.
Income Taxes
For the Quarter Ended
For the Nine Months Ended
September 30,
September 30,
September 30,
September 30,
2023
2022
2023
2022
(Dollars in thousands)
Income tax expense (benefit)
$
4,562
$
4,410
$
12,802
$
12,625
Income (loss) before income taxes
21,425
21,690
61,820
62,278
Effective tax rate
21
%
20
%
21
%
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 stock-based compensation.
The Company’s effective tax rate benefited
from tax-exempt interest in both the three-
and nine-
month periods ended September
30, 2023 compared to the same periods in 2022.
However, the impact of tax-exempt interest on the overall tax rate is lower in 2023 as
its proportion to total income was lower as compared to 2022. We currently anticipate the Company’s
effective tax rate to remain within
the 20% to 22% range in the near term.
Analysis of Financial Condition
Total assets were $7.2 billion at September 30, 2023 compared to $6.6
billion at December 31, 2022, an increase of $0.6 billion,
or 9%, including $0.2 billion as a result of the Tucson acquisition.
Cash and cash equivalents decreased $67 million, or 22%, from
December 31, 2022, and investment securities increased $64
million, or 9%. Loans increased $0.6 billion, or 11%, including $0.1 billion
as a result of the Tucson acquisition, and the allowance for credit losses increased $10 million to $72
million at September 30, 2023.
Total deposits increased $0.7
billion to $6.3 billion at September 30, 2023, compared to December 31,
2022, including $0.2 billion as a
result of the Tucson acquisition.
Federal Home Loan Bank (“FHLB”) advances totaled $89 million and decreased
$130 million
compared to December 31, 2022.
Investment Portfolio
The primary objective of our investment portfolio is to ensure adequate liquidity, including
serving as a contingent, on-balance
sheet source of liquidity.
In addition, we manage the portfolio in a manner that optimizes earnings, manages
credit and interest rate risk,
64
and meets pledging and regulatory capital requirements. Our portfolio is 100%
available-for-sale and as of September 30, 2023 totaled
$750 million, an increase of $64 million from December 31, 2022.
The increase in the investment portfolio was driven by the purchase of $107
million in SBA securities,
$45 million in mortgage-
backed securities, $15 million in U.S. Treasury securities,
and $12 million in tax-exempt municipal securities.
The increase was
partially offset by an increase of $37 million in the unrealized loss on available-for-sale
securities.
Additional offsets include the sale of
$67 million in tax-exempt municipal securities at a modest gain and $14
million of paydowns and maturities in mortgage-backed
securities as we intentionally improved the liquidity of the portfolio during the
year, consistent with our current investment strategy.
Our
future investment strategy includes reducing the concentration in municipal
investments, investing in lower risk-weighted assets and
restructuring the portfolio to increase liquidity and provide more balanced
cash flow.
For additional information, including information
regarding other securities owned by the Company, see “Note 3: Securities” in the
notes to consolidated financial statements – unaudited.
The following table shows the estimated fair value, percent of the portfolio and
weighted average yield of our available-for-sale
securities as of the dates indicated:
As of September 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)
U.S. Treasury securities
$
14,803
2
%
5.11
%
$
-
-
%
-
%
Mortgage-backed - GSE residential
298,044
40
3.58
172,309
25
2.39
%
Collateralized mortgage obligations - GSE
residential
18,724
2
4.68
10,886
2
2.36
State and political subdivisions
410,442
55
2.80
494,496
72
2.80
Corporate bonds
8,474
1
5.69
9,210
1
5.70
Total available-for-sale securities
$
750,487
100
%
3.21
%
$
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.
65
Loan Portfolio
Refer to “Note 4: Loans and Allowance for Credit Losses” within the notes to consolidated financial statements – unaudited
for additional information regarding the
Company’s loan portfolio. As of September 30, 2023, gross loans, net of unearned
fees increased $573 million or 11% from December 31, 2022.
The increase in loans includes
$106 million related to the Tucson acquisition. The following table presents the balance and associated percentage
change of each segment within our portfolio as of the dates
indicated:
As of September 30,
2023
As of December 31,
2022
December 31, 2022 vs.
September 30, 2023
% Change
(Dollars in thousands)
Commercial and industrial
$
2,056,171
$
1,974,932
4.1
%
Energy
214,166
173,218
23.6
Commercial real estate - owner-occupied
583,442
437,119
33.5
Commercial real estate - non-owner-occupied
2,592,684
2,314,600
12.0
Residential real estate
456,047
439,367
3.8
Consumer
43,243
33,493
29.1
Total
$
5,945,753
$
5,372,729
10.7
%
Our loan portfolio remains balanced with 44% of loans in commercial and industrial and
owner-occupied commercial real estate and 43% of loans in
non-owner-occupied
commercial real estate. There remains diversity within our loan portfolio segments
with the highest commercial real estate property type accounting for 19%
of total commercial real
estate exposure, and the largest industry segment in commercial and industrial
being manufacturing at 10% of commercial and industrial exposure.
66
The following table shows the contractual maturities of our gross loans and sensitivity to
interest rate changes:
As of September 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
$
122,203
$
578,059
$
336,284
$
856,655
$
65,863
$
76,728
$
20,115
$
264
$
2,056,171
Energy
-
18,834
489
194,843
-
-
-
-
214,166
Commercial real estate -
owner-occupied
13,268
31,738
174,065
83,324
109,329
114,691
2,540
54,487
583,442
Commercial real estate - non-
owner-occupied
93,247
289,764
582,605
1,196,536
104,175
218,449
12,926
94,982
2,592,684
Residential real estate
5,253
2,039
25,172
10,187
67,731
26,434
3,524
315,707
456,047
Consumer
20,407
12,267
5,953
4,300
218
98
-
-
43,243
Total
$
254,378
$
932,701
$
1,124,568
$
2,345,845
$
347,316
$
436,400
$
39,105
$
465,440
$
5,945,753
Allowance for Credit Losses
The ACL at September 30, 2023 represents our best estimate of the expected credit losses in the Company’s
loan portfolio and off-balance sheet commitments, measured over
the contractual life of the underlying instrument.
67
The 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.
September 30, 2023
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
$
30,744
$
185
$
30,929
39
%
34
%
$
26,803
$
319
$
27,122
39
%
37
%
Energy
4,343
174
4,517
6
4
4,396
787
5,183
7
3
Commercial real estate -
owner-occupied
7,294
264
7,558
10
10
5,214
221
5,435
8
8
Commercial real estate -
non-owner-occupied
25,616
5,426
31,042
40
43
21,880
7,323
29,203
41
43
Residential real estate
3,460
64
3,524
5
8
3,333
35
3,368
5
8
Consumer
99
-
99
-
1
149
3
152
-
1
Total
$
71,556
$
6,113
$
77,669
100
%
100
%
$
61,775
$
8,688
$
70,463
100
%
100
%
Refer to “Note 4: Loans and Allowance for Credit Losses” within the notes to consolidated financial statements – unaudited
for a summary of the changes in the ACL.
Charge-offs and Recoveries
Net charge-offs were $1.3 million and $3.5 million for the three-
and nine-month periods ended September 30, 2023, respectively. For the three
-month period ended
September 30, 2023, charge-offs were primarily due to one commercial and
industrial loan that was previously reserved.
For the nine-month period ended September 30, 2023, there
were charge-offs of three additional commercial and industrial loans. The below table provides
the ratio of net charge-offs (recoveries) to average loans outstanding based on our
loan categories for the periods indicated:
For the Quarter Ended
September 30,
 
June 30,
 
March 31,
 
December 31,
 
September 30,
 
20222023
2023
2023
2022
2022
2021Commercial and industrial
2021
(Dollars in thousands)
Loans Past Due Detail
30 - 59 days past due
$
15,785
$
15,700
$
14,815
$
1,671
$
3,072
60 - 89 days past due
5,598
935
1,135
1,858
34,528
Total gross loans 30 - 89 days past due
$
21,383
$
16,635
$
15,950
$
3,529
$
37,600
Loans 30 - 89 days past due / gross loans
0.460.24
%
0.370.14
%
0.370.31
%
0.08(0.02)
%
0.890.48
%
Classified LoansEnergy
Substandard-
(0.23)
-
(0.46)
1.19
Commercial real estate - performing
$
55,038
$
52,759
$
40,257
$
47,275
$
75,999
Substandard - non-performing
15,135
25,530
30,619
28,879
45,063
Doubtful
1,788
2,144
2,451
2,554
3,084
Lossowner-occupied
-
-
-
-
-
Commercial real estate - non-owner-occupied
-
-
-
-
(0.15)
Residential real estate
-
-
-
-
-
Consumer
-
0.04
-
(0.04)
-
Total classified, grossnet charge-offs to average loans
71,9610.09
80,433%
73,3270.04
78,708%
124,1460.12
%
(0.02)
%
0.16
%
68
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.
Non-performing assets increased $22.8 million during the quarter
to $36.1 million at September 30, 2023 primarily due to one commercial and industrial
credit and one
commercial real estate - non-owner-occupied credit moving to non-accrual and several credits
that were 90+ days past due and still accruing at quarter-end. The non-performing
assets to total assets ratio increased from 0.31% at September 30, 2022 to 0.50%
at September 30, 2023. Annualized net charge-offs were 0.09% for the quarter compared to 0.04%
in the prior quarter and 0.16% in the prior year third quarter. With respect to one commercial and industrial credit
with a $13.6 million balance that was over 90 days past due, the
borrower raised new equity capital and brought the credit current after quarter end, reducing our
non-performing assets to total assets ratio to 0.31%.
The Company continues to monitor the U.S. economic indicators, including the inflation rate,
the unemployment 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 September 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
September 30,
June 30,
March 31,
December 31,
September 30,
2023
2023
2023
2022
2022
Asset Quality
(Dollars in thousands)
Non-accrual loans
$
20,380
$
12,867
$
9,490
$
11,272
$
16,923
Loans past due 90 days or more and still accruing
15,750
433
868
750
303
Total non-performing loans
36,130
13,300
10,358
12,022
17,226
Foreclosed assets held for sale
973-
-
855
1,130
973
973
1,148
1,148
Total classifiednon-performing assets
$
72,93436,130
$
81,40613,300
$
74,30011,213
$
79,85613,152
$
125,29418,199
Loans 30-89 days past due
$
29,457
$
13,333
$
5,056
$
19,519
$
21,383
Asset quality metrics (%)
Non-performing loans to total loans
0.61
%
0.23
%
0.18
%
0.22
%
0.37
%
Non-performing assets to total assets
0.50
0.19
0.16
0.20
0.31
ACL to total loans
1.20
1.17
1.15
1.15
1.19
ACL + RUC to total loans
(1)
1.31
1.30
1.30
1.31
1.34
ACL to non-performing loans
198
508
629
514
324
Classified loans / (total capital + ACL)
11.314.2
%9.7
12.19.4
%10.1
10.8
%
10.8
%
17.3
%11.3
Classified loans / (total capital + ACL +
ACL on off-
balance sheet) RUC)
(1)
11.2
12.0
10.7
N/A
N/A
Classified assets / (total capital + ACL)
11.514.0
%
12.39.6
%
11.09.3
%
11.010.0
%
17.511.2
%
(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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
6769
Deposits and Other Borrowings
At September 30, 2023, our deposits totaled $6.3
billion, an increase of $680 million or 12% from December 31, 2022. The increase included
a $798 million increase in time
deposits and $253 million in money market, NOW and savings deposits, parti
ally offset by a decrease of $371 million in non-interest-bearing
deposits. The increases in deposits
include $165 million related to the Tucson acquisition.
Approximately 45% 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 30,
 
30, 2022:2023:
As of September 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
$
35,18865,429
$
22,271229,548
$
27,877169,110
$
159,67517,895
$
245,011481,982
Time deposits below FDIC insurance limit
176,316433,065
100,125390,354
125,601324,581
103,118113,671
505,1601,261,671
Total
$
211,504498,494
$
122,396619,902
$
153,478493,691
$
262,793131,566
$
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.1,743,653
Other borrowings include Federal Home Loan Bank (“FHLB”)FHLB advances, repurchase agreements, a line of credit,
SBA loan secured borrowings, and our
trust preferred security.
At September
30, 2022,2023, other
borrowings totaled $206$107 million, a $31
$147 million, or 13%58% decrease from December 31, 2021.
2022. Borrowings were reduced due to client deposit growth and acquired deposit
balances.
During the nine-month
period ended September 30, 2022, $21.52023, $31 million of FHLB advances matured, $12.5
 
million of net FHLB
advancesmatured and were paid off and $65 million of advances converted
into a drawdown on the FHLB line of credit. The Company utilized thecredit, an additional $12
conversion of $65million matured and $12 million of net FHLB advances were paid off
.
With respect to
the FHLB line of credit, the Company paid
down the converted $31 million of FHLB advances
and an additional $2.7$75 million, of net, withdrawals to support
loan growth and changes in deposits,
resulting in $67.7 milliona zero balance on the FHLB line of credit atas of September
September 30, 2022.2023.
As of September 30, 2022,2023, the Company had approximately $2.4 billion of uninsured
 
of uninsured deposits, which is an estimated amount based on the same methodologies
and assumptions
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
$2.1 billion, or 33% of total deposits as of September 30, 2023. The average client account
balance as of September 30, 2023 is less than $250 thousand for both individual accounts
and business accounts in total after excluding pass-through and insured cash sweep 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
70
Liquidity and Capital Resources
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. We also
conduct contingency funding plan stress tests at least annually to assess potential liquidity
outflows or funding problems resulting from
economic disruptions, volatility in the financial markets, unexpected credit
events or other significant occurrences deemed potentially
problematic by management. The Company’s
liquidity strategy is to maintain adequate, but not excessive, liquidity to meet the daily
cash flow needs of clients while attempting to achieve adequate earnings for stockholders.
The Company measures liquidity needs
through daily balance sheet monitoring, weekly cash projections and
monthly liquidity measures reviewed in conjunction with Board-
approved liquidity policy limits. The Company's short-term and long-term liquidity requirements
are primarily met through cash flow
from operations, redeployment of proceeds from 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 statement 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:
September 30, 2023
December 31, 2022
(Dollars in thousands)
Total on-balance sheet liquidity
$
983,678
$
986,482
Total off-balance sheet liquidity
1,435,631
770,165
Total liquidity
$
2,419,309
$
1,756,647
On-balance sheet liquidity as a percent of assets
14
%
15
%
Total liquidity as a percent of assets
34
%
27
%
Off-balance sheet liquidity increased from December 31, 2022 to September 30,
2023 primarily due to increases in available
funding with FHLB and the Federal Reserve Bank.
For the nine-months ended September 30, 2023, the Company’s
cash and cash equivalents decreased $67 million from December
31, 2022 to $233 million, representing 3% of total assets. During the nine-month period
ended September 30, 2023, the Company
increased the available-for-sale securities portfolio on an amortized cost basis by $101 million,
net of paydowns,
maturities, and
amortization.
As of September 30, 2023, the Company had $332 million in securities that could be
pledged and $46 million that could
be sold at a net gain based on market conditions at the time. In addition, the Company increased
funded loans by $471 million, net of
payoffs and charge-offs during the nine-month period ended September
30, 2023 that reduced cash and cash equivalents.
The Company’s time deposits increased by $780
million primarily from wholesale funding, new client money and shifts from
other deposit categories. Savings and money market deposits increased by $253
million. Non-interest-bearing deposits decreased $371
million as elevated year-end balances were deployed by clients in the first quarter
of 2023 in addition to clients migrating into interest-
bearing deposits.
FHLB advances and other borrowings decreased $147 million during the nine-month period
ended September 30,
2023, largely related to a reduction in FHLB advances due to client deposit growth and
acquired deposit balances.
The Company did not purchase any common stock during the first nine months of 2023. As of September 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 cash flow needs. There is no
assurance that we will repurchase up to the full amount remaining under our program.
Dividends of $258 thousand related to the Series A Non-Cumulative Perpetual Preferred Stock were declared and paid by the
Company during the nine-months ended September, 2023. In October 2023,
the Board of Directors declared a quarterly dividend on
 
 
6871
LiquiditySeries A Non-Cumulative Perpetual Preferred Stock in the amount of $20.00 per share to be payable on December 15, 2023 to
shareholders of record as of November 30, 2023.
The Company believes that its current on and Capital Resourcesoff-balance sheet liquidity will be
sufficient to meet anticipated cash requirements
for the next 12 months and thereafter. The Company believes that it has several on and off-balance sheet
options to address reductions in
cash and cash equivalents in order to maintain appropriate liquidity.
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 6:8: Time
 
Deposits and Other Borrowings” and “Note 5: Leases”
within the Notesnotes to
Condensed Consolidated Financial Statements (unaudited) consolidated financial statements – unaudited for information regarding
 
a listing of the Company’s significant contractual
 
cash obligations. Refer
to “Note 14: Leases” within the Notes to Condensed Consolidated Financial Statements
(unaudited) for the Company’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
 
the Company’s future cash requirements.
 
However, a portion
of these commitments may expire without being drawn upon. Refer to “Note 15:
 
“Note 12: 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 longlong-term contractual
 
-term contractual obligations, including off-balance sheet obligations,
 
sheet obligations, may be satisfied
through the Company’s on-balance
 
sheet and off-balance sheet liquidity discussed below.
Liquidity
The Company’s liquidity strategy is to maintain adequate, but not excessive,
liquidity to meet the daily cash flow needs of clients
while attempting to achieve adequate earnings for stockholders. The liquidity
position is monitored continuously by management. The
Company's short-term and long-term liquidity requirements are primarily
met through cash flow from operations, redeployment of
prepaying and maturing balances in our loan portfolio and security portfolio,
increases in client deposits and wholesale deposits.
Liquidity resources can be derived from two sources: (i) on-balance
sheet liquidity resources, which represent funds currently on the
balance sheet and (ii) off-balance sheet liquidity resources, which represent
funds available from third-party sources. The Company’s
on-balance sheet and off-balance sheet liquidity resources consisted of
the following as of the dates indicated:
September 30, 2022
December 31, 2021
(Dollars in thousands)
Total on-balance sheet liquidity
$
964,952
$
1,224,253
Total off-balance sheet liquidity
779,990
732,748
Total liquidity
$
1,744,942
$
1,957,001
On-balance sheet liquidity as a percent of assets
17
%
22
%
Total liquidity as a percent of assets
30
%
35
%
For the nine-months ended September 30, 2022, the Company’s cash
and cash equivalents declined $174 million from December
31, 2021 to $309 million, representing 5% of total assets. During the nine-month
period ended September 30, 2022, the Company
increased the AFS securities portfolio on an amortized cost basis by $48 million, net of paydowns,
maturities, and amortization, to
improve the yield on interest-earning assets. In addition, the Company
increased loan funding by $425 million, net of payoffs and
charge-offs during the nine-month period ended September 30, 2022
that reduced cash and cash equivalents.
The Company’s time deposits increased by $126 million primarily from
wholesale funding. Non-interest-bearing deposits,
savings, and money market deposits increased $178 million driven primarily
by increases in ICS deposits and both business and
personal money market deposits. Other borrowings decreased $31
million during the nine-month period ended September 30, 2022,
as
net amounts of $34 million of FHLB advances matured or were paid
off and a net $3 million was drawn down on the FHLB line of
credit.
The Company continued its repurchase program, purchasing $31
million of common stock during the first nine months of 2022.
As of September 30, 2022, $21 million remains available for repurchase
under our share repurchase program. We expect to continue to
repurchase shares under our share repurchase program, but the amount and timing
of such repurchases will be dependent on a number of
69
factors, including the price of our common stock and other cash flow needs. There is no assurance
that we will repurchase up to the full
amount remaining under our program.
The Company believes that its current liquidity will be sufficient to meet anticipated
cash requirements for the next 12 months
and thereafter. The Company believes that is has several on and off-balance sheet options
to address any resulting reductions in cash and
cash equivalents in order to maintain appropriate liquidity.above.
Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered
 
administered by the federal banking agencies.
The regulatory capital requirements involve quantitative measures of the
 
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
 
Company’s consolidated financial statements. Refer to “Note 8:10:
Regulatory Matters”
in the Notesnotes to Condensed Consolidated Financial Statementsconsolidated financial statements – unaudited for additional
 
(unaudited) for additional information. Management
believes that
as of September 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
 
assumptions that
affect the amounts reported in the financial statements and accompanying notes. The
 
notes. The Company bases estimates on historical experience
and on various other assumptions that it believes
to be reasonable under current circumstances.
These assumptions form the basis for
management judgments about the carrying values of assets and liabilities that
are not readily
available from independent, objective
sources. The Company evaluates
estimates on an ongoing basis. Use of alternative assumptions
may have resulted
in significantly
different estimates. Actual results may differ from these estimates.
A discussion of these policies can be found in the section captioned “Critical Accounting Policies and Estimates” in
Management’s Discussion and Analysis of Financial Condition and Results of Operations
included in the 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
7172
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’sCompany
’s
balance sheetstatement of financial condition management. Interest rate risk is the risk that net interest margins
 
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’s statement 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)
 
(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
 
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
September 30, 20222023
September 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
(0.1)
%
(18.1)
%
6.1
%
(11.1)
%
6.4+200
%(0.1)
(8.9)
%
+200(12.9)
4.1
(7.3)
3.6+100
(5.7)(0.1)
+100(7.0)
2.0
(3.2)
1.1
(3.0)
Base
-
%
-
%
-
%
-
%
-100
0.3
7.4
(1.9)
3.2
NA-200
(1)1.0
NA
(1)
-20013.6
(5.7)
5.7
NA-300
(1)0.8
NA
(1)
-30020.6
(10.1)
7.1
NA
(1)
NA
(1)
(1)
The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment.
Hypothetical Change in Interest Rate - Rate Ramp
September 30, 20222023
September 30, 20212022
Change in Interest Rate
 
(Basis Points)
Percent change in net interest
income
Percent change in net interest
income
+300
2.9(1.0)
%
2.52.9
%
+200
1.9(0.7)
1.21.9
+100
1.0(0.4)
0.21.0
Base
-
%
-
%
-100
(0.9)0.4
NA
(1)(0.9)
-200
(2.1)0.8
NA
(1)(2.1)
-300
(4.1)1.1
NA
(1)
(1)
The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment.(4.1)
 
7273
The Company’s position is slightly relatively neutral as of
September 30, 2023, which is less sensitive as compared to both September 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 less
asset sensitive due to the reduction in demand deposits and an on-balance sheet interest
rate collar that
becomes effective in the first quarter of 2024. The aggregate beta assumption utilized as of
September 30, 2023 was approximately 60%
which is unchanged from our previous assumption. Other key assumptions updated
during 2023 include updated deposit decay rates,
new business spreads and updating market yield curves. Other assumptions included
in the model that are periodically updated include
loan prepayments and call provisions within investment and debt holdings. The
Company is monitoring interest rate sensitivity closely
as $4.1
billion, or 68%, of loans mature or reprice within the twelve-month period following September
30, 2023, including $2.8 billion
that repriced in the first month of the fourth quarter.
$5.3 billion of interest-bearing liabilities mature or reprice over
the same twelve-
month period. As of September 30, 2022. The hypothetical positive2023 and December 31, 2022, the investment portfolio
 
change in net interestduration was approximately 5.6 and 5.2
income as of September 30, 2022 in an up 100 basis point shock is mainly due
to approximately $3.6
billion of the Company’s earning
assets repricing or maturing within the first year, with $2.8 billion of that being
in the first month. In addition, $624 million of the
Company’s time deposits and other borrowings mature or reprice
within that same 12-month period. Assuming the same balance sheet
mix, the Company currently anticipates an increase to net interest income
in all upward rate ramp and shock scenarios. In down rate
scenarios, income is predicted to decrease.years, respectively. The Company is monitoring longer term
 
reviewing additional options to manage the statement of financial condition
sensitivity based on the
interest rate expectationsenvironment and is evaluating options
to reduceanticipated composition of assets and liabilities in the impact of any downward rate adjustments, includingnext twelve
 
the use of hedges.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
 
or precisely predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and
 
frequency
of interest rate changes as well as changes in market conditions, customer behavior
 
and management strategies, among other factors.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management,
with the participation of the Company’s
Chief Executive
Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company’s
disclosure controls and procedures
(as (as defined in Rule 13a-15(e)
under the Securities
Exchange Act of 1934 (“Exchange Act”)) as of September 30, 2022.2023. Based on that evaluation, the Company’s
Chief Executive Officer
and Chief Financial
Officer concluded that the Company’s
disclosure controls and procedures were effective
as of September
30, 2022.2023.
 
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 as necessary to accommodate
 
the new standard.
modifications to our business
Noprocesses and accounting procedures. There has been no change in the Company’sour internal control over
financial reporting (as such term
is defined
in Rule 13a-15(f) under the
Exchange Act) that occurred during the third quarter of 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
 
cash flows or growth prospects. However, given the
nature, scope, and complexity of the extensive legal and regulatory landscape applicable
 
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
 
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,
 
condition, or results of operations in future
periods.
There were no material changes from the risk factors disclosed in the 20212022 Form 10-K.
 
 
 
7374
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
(a)
None.On August 1, 2023, the Company issued 597,645 shares of its common stock to Canyon Bancorporation,
Inc. stockholders as partial
merger consideration in the Tucson acquisition. The Company’s
common stock was valued at a per share price of approximately
$14.11 for purposes of calculating the merger consideration. The shares of common stock issued
as partial merger consideration
were not registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemption from
registration provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and were issued in
compliance with such exemption only to "accredited investors."
(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. The objective
of the program is to give the Company the ability to
opportunistically acquire undervalued shares and return capital to shareholders.
No shares were repurchased during the three-
months ended September 30, 2023.
As of September 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 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. Our officers
and directors are prohibited from
trading in the Company’s securities
if they are in possession of material non-public information and
must at all times comply with
the Company’s Insider Trading Policy, including
quarterly blackout periods and pre-clearance procedures.
ITEM 5. OTHER INFORMATION
(a)
None
(b)
None
(c)
Trading Arrangements
During the three months ended September 30, 2023, (i) 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; and (ii) the Company did not adopt or
terminate a “Rue 10b5-1 trading
arrangement,” as such term is defined in Item 408 of Regulation S-K.
 
 
 
7475
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
 
 
7576
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on
 
on its
behalf by the undersigned thereunto duly authorized.
CrossFirst Bankshares, Inc.
Date:
November 8, 20223, 2023
/s/ Benjamin R. Clouse
 
Benjamin R. Clouse
 
Chief Financial Officer
 
(Principal Financial OfficerDuly authorized officer and Principal Accounting Officer)principal financial officer)