EDGAR 10-K Filing

Company CIK: 1458412
Filing Year: 2023
Filename: 1458412_10-K_2023_0001562762-23-000082.json

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ITEM 1. BUSINESS
ITEM 1.
BUSINESS
Our Company
CrossFirst Bankshares, Inc., a Kansas corporation and registered bank
holding company (the “Company”), is the holding company for
CrossFirst Bank (the “Bank”). The Company was initially formed as a limited liability
company, CrossFirst Holdings, LLC, on September 1,
2008,
to become the holding company for the Bank and converted to a corporation in 2017. The Bank was established
as a Kansas state-
chartered bank in 2007 and provides a full suite of financial services to businesses, business
owners, professionals, and their personal
networks through our branch offices located in Kansas, Missouri, Oklahoma, Texas,
Arizona,
Colorado and New Mexico.
Unless we state otherwise or the context otherwise requires, references
in the below section to “we,” “our,” “us,” “ourselves,” “our
company,” and the “Company” refer to CrossFirst Bankshares, Inc.,
a Kansas corporation, its predecessors and its consolidated subsidiaries.
References to “CrossFirst Bank” and the “Bank” refer to CrossFirst Bank, a Kansas chartered
bank and our wholly owned consolidated
subsidiary.
Since opening our first branch in 2007, we have grown organically primarily by
establishing new branches, attracting new clients and
expanding our relationships with existing clients, as well as through three
strategic acquisitions.
Since inception, our strategy has been to be a
trusted partner providing customized financial solutions for our clients,
which we believe has driven value for our stockholders.
We are
committed to a culture of serving our clients and communities in extraordinary
ways by providing personalized, relationship-based banking.
We believe that success is achieved through establishing and growing the trust of
our clients, employees, stockholders,
and communities. We
remain focused on growth and are equally focused on building stockholder
value through greater efficiency and increased profitability. We
intend to execute our strategic plan through the following:
•
Continue organic growth;
•
Selectively pursue opportunities to expand through acquisitions
or new market development;
•
Improve financial performance;
•
Attract, retain and develop talent;
•
Maintain a branch-light business model with strategically placed locations;
and
•
Leverage technology to enhance the client experience and improve profitability.
Developments during the Fiscal Year ended December 31, 2022
In May of 2022, the Company announced a new share repurchase program under
which we could repurchase up to $30 million of
Company common stock. This program remains in effect. The Company completed the share repurchase
program previously announced in
October 2021 during the third quarter of 2022. During 2022, the Company
repurchased $36 million, representing 2,448,428 common shares,
at an average price per share of $14.61 under both repurchase programs.
The Company announced on June 13, 2022, an agreement under
which CrossFirst Bank would acquire Central Bancorp, Inc.’s bank
subsidiary, Farmers & Stockmens Bank (“Central”),
in an all-cash transaction. The transaction was closed on November 22, 2022.
In June 2022, Amy Abrams was appointed as the Company’s General Counsel and Corporate Secretary.
In June of 2022, the Company announced the promotion of W. Randall Rapp, the Bank's current
Chief Risk and Credit Officer, to the
position of President of the Bank, to be effective July 1, 2022.
In his new role, Mr. Rapp has responsibility for production, credit, operations,
risk and technology of the Bank and reports to the Chief Executive Officer of
the Bank and the Company.
In connection with his promotion,
Mr. Rapp relinquished the position of Chief Risk and Credit Officer of the
Bank. With this promotion, the roles of President and Chief
Executive Officer of the Bank, formerly held by Michael J. Maddox, were
split, and Mr. Maddox continues as the Chief Executive Officer of
the Bank and President and Chief Executive Officer of the Company.
Jenny Payne was named Chief Risk Officer of the Bank, and Tom
Robinson was named Chief Credit Officer of the Bank.
We continued our expansion into high growth metro markets such as: Frisco, Phoenix,
Denver, and Colorado Springs, and we added
and expanded industry verticals including Sponsor Finance,
Financial Institutions, SBA, Residential
Mortgage and Franchise Finance.
We launched our new digital banking platform in the fourth quarter, providing
enhanced online tools and resources for our clients. The
Q2 platform provides a responsive design with features and functionality parity
between online and mobile banking and gives the Company
the ability to enhance our digital client experience with additional revenue
generating opportunities.
Products and Services
The Bank operates as a regional bank providing a broad offering of deposit and
lending products to commercial and consumer clients.
The Bank’s branches are strategically located in Kansas, Missouri,
Oklahoma, Texas, Arizona, Colorado and New Mexico.
Our approach to
banking starts with our extraordinary service commitment. Our approach
is highly tailored to our clients with the ability to customize
products and services to meet our clients’ individual needs. In addition to our branch locations, we also offer private banking
solutions and
commercial banking solutions.
Private banking services offer clients an enhanced level of service through
the support of a dedicated Private
Banker. Our commercial banking teams are run by experienced business leaders who
understand the unique challenges and opportunities that
come from running and growing a business. Our commercial banking solutions
across lending, deposits and treasury management are
designed to meet the needs of our client regardless of size or industry. We serve consumer
clients though our branch network as well as our
digital banking products.
We focus on the following loan categories: (i) commercial and industrial loans,
including enterprise value lending; (ii) commercial real
estate loans; (iii) construction and development loans, including home builder
lending; (iv) residential real estate loans; (v) multifamily real
estate loans; (vi) energy loans; (vii) Small Business Administration (“SBA”) loans; (viii) consumer loans
;
and (ix) secondary market
mortgage loans.
We also offer deposit banking products including: (i) personal and business checking
and savings accounts; (ii) international banking
services; (iii) treasury management services; (iv) money market accounts;
(v) certificates of deposits; (vi) negotiable order of withdrawal
accounts; (vii) automated teller machine access; and (viii) mobile banking.
Competition
The banking and financial services industry is highly competitive, and we compete with
a wide range of financial institutions within
our markets, including local, regional and national commercial banks and
credit unions. We also compete with mortgage companies, trust
companies, brokerage firms, consumer finance companies, securities firms,
insurance companies, third-party payment processors, financial
technology (“Fintech”) companies, and other financial intermediaries.
Some of our competitors are not subject to the regulatory restrictions
and level of regulatory supervision applicable to us.
Human Capital Resources
Employee Profile
As of December 31, 2022, the Company had 465 full-time equivalent
employees primarily in locations across the states of Kansas,
Missouri, Oklahoma, Texas,
Arizona,
Colorado and New Mexico; however, technology has allowed us to expand our reach to include
a larger
demographic with more remote employees working outside of our physical locations
and throughout the country. None of our employees are
parties to a collective bargaining agreement, and we consider our relationship
with our employees to be good.
During fiscal year 2022 we
hired 212 employees (including as part of the acquisition of Farmers & Stockmens
Bank). Our regretted turnover rate was 14.6% in fiscal
year 2022, which we believe was due primarily to a competitive labor market
and a shortage of talent.
We believe a diverse
workforce is critical to long-term success and seek to build and maintain a diverse
and inclusive environment.
As of
December 31, 2022, approximately 61% of our current workforce
self-identifies as female and 39% as male.
As of December 31, 2022, 45%
of our executive and senior leadership team self-identifies as female.
Culture
We strive to attract, retain, and develop top talent with diverse knowledge, perspectives,
and experience to achieve our strategic
objectives.
Our Chief Human Resources Officer, reporting directly to our Chief Executive Officer,
oversees our human capital management
strategies. In addition, our Board of Directors is actively involved in our human
capital management in its oversight of our long-term strategy
and through its committees and engagement with management.
We have a strengths-based culture where our employees utilize their strengths
to set the course and are empowered to deliver
extraordinary services for our clients. We strive to maintain our high-performing
culture and be an “employer of choice” by creating an
inclusive environment that attracts and retains high-quality, engaged
employees who embody our core values of character, competence,
commitment and connection. We are focused on sourcing and hiring talent that will be a
cultural fit to our core values and have backgrounds
that are as diverse as the clients we serve.
Pay Equity
We believe our
employees should be compensated on their experience and performance for the roles they fulfill,
and our goal is to
attract, retain and develop top-quality talent. To
deliver on that commitment, we set pay ranges based on banking market data
and consider
factors such as an employee’s role
and experience, the location of their job, and their performance. We
also regularly review our
compensation practices, both in terms of our overall workforce and
individual employees, to ensure our pay is fair and equitable.
Diversity, Equity and Inclusion
We believe that an equitable and inclusive environment with diverse teams supports
our core values and strategic initiatives.
We are
focused on maintaining and enhancing our inclusive culture through
our CrossFirst Cares program, which represents our initiatives and
efforts to support the diverse thoughts, ideas and perspectives of our employees and
their wellbeing. Our IDEA Champions employee
resource group is focused on promoting diversity, equity and inclusion,
while supporting CrossFirst’s core values and strengths-based
culture. These groups enhance an inclusive culture through company events, participation
in our recruitment efforts, training opportunities,
and input into our development strategies. During 2022, we provided
unconscious bias training for all employees.
Compensation and Benefits Program
As part of our compensation philosophy, we offer and maintain competitive
total rewards programs to attract and retain superior talent
throughout our market footprint. In addition to competitive base
pay, we also offer annual incentive opportunities, long-term incentive
opportunities, a Company-augmented Employee Stock Ownership Plan,
Company-matched 401(k) Plan, healthcare and insurance benefits,
health savings and flexible spending accounts, paid time off, parental
leave, a Volunteer Time Off (“VTO”) program, flexible work
schedules, and employee assistance programs.
Community Involvement
We build strong relationships within the communities we serve, and
we support the passions of our employees. We encourage our
employees to volunteer their time and talent by serving on boards and supporting
the communities where they live and work.
We understand that helping our employees devote their energies to causes that matter
to them, to their communities and to those
individuals who are most in need makes a broader impact. Our CrossFirst VTO program provides
paid leave for these volunteer activities.
Our spirit of employee giving is also championed through our Generous
Giving Program.
Through this program, we offer every
employee the opportunity to provide financial support for others by
matching up to $500 per employee gift, per year. Our Generous Giving
Program is designed to give our employees additional resources to make
a difference in people’s lives. Since its inception in 2017, our
Generous Giving Program donations total approximately $490
thousand.
We focus on giving back to the communities we serve and providing opportunities
to our employees to share in that effort.
At the
same time, we recognize that participating in these activities enriches all our
lives.
Workplace Health, Safety and Wellness
The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed
to the health,
safety and wellness of our employees. We provide our employees and their families with
access to a variety of flexible and convenient health
and welfare programs. This includes offering benefits to support their physical
and mental well-being; providing tools and resources to help
improve or maintain their health status; and offering choices where possible
for employees to customize their benefits to meet their needs and
the needs of their families. The COVID-19 pandemic led us to evaluate our operating
environment to ensure our employees were able to
continue working safely.
As a result, we implemented significant changes including providing flexible
work from home options for a large
percentage of our employees, while implementing additional safety measures
for employees continuing critical on-site work. We have
continued to offer these for the benefit of our employees, clients and communities.
Annually, we conduct an all-employee engagement and satisfaction
survey. We consistently have 90% participation in our engagement
survey, scoring in the top third of companies compared to other Gallup organizations,
with over 67% of our employees who are classified by
Gallup as highly engaged.
During 2022, the Company received the WELL Health-Safety Rating through the International WELL Building Institute. This rating is
an evidence-based, third-party verified rating for all new and existing buildings
focused on operational policies, maintenance protocols,
stakeholder engagement, and emergency plans to address a post COVID-19
environment.
Talent Development
We prioritize and invest in creating opportunities to help our employees grow
and build their careers through a variety of training and
development programs. These include online, classroom and on-the-job learning formats
paired with an individualized development
approach.
A core tenet of our talent system is to both develop talent from within and supplement with external candidates. This approach has
yielded loyalty and commitment in our employee base which benefits our business,
our products, and our clients.
In 2022, over 17% of our
current employees were promoted into roles with increased responsibilities. The addition
of new employees and external ideas supports our
culture of continuous improvement and a diverse and inclusive workforce.
Our performance management framework includes monthly business and functional
reviews, along with one-on-one and quarterly
forward-looking goal setting and development discussions, followed by annual
opportunities for pay differentiation based on overall
employee performance distinction.
Supervision and Regulation
The following is a general summary of the material aspects of certain statutes and
regulations that are applicable to us. These
summary descriptions are not complete. Please refer to the full text of the statutes, regulations,
and corresponding guidance for more
information. These statutes and regulations are subject to change, and additional
statutes, regulations, and corresponding guidance may be
adopted. We are unable to predict future changes or the effects, if any, that these changes could have on our business or our revenues.
General
We are extensively regulated under U.S. federal and state law. As a result, our growth and earnings performance
may be affected not
only by management decisions and general economic conditions,
but also by federal and state statutes and by the regulations and policies of
various bank regulatory agencies, including the Office of the State Bank Commissioner
of Kansas, the Federal Reserve, the Federal Deposit
Insurance Corporation (“FDIC”) and the Consumer Financial Protection
Bureau (“CFPB”). Furthermore, tax laws administered by the
Internal Revenue Service (“IRS”) and state and local taxing authorities, accounting
rules developed by the Financial Accounting Standards
Board (“FASB”), securities laws administered by the Securities and Exchange
Commission (“SEC”) and state securities authorities and Anti-
Money Laundering (“AML”) laws enforced by the U.S. Department of
the Treasury also impact our business. The effect of these statutes,
regulations, regulatory policies and rules are significant to our financial condition
and results of operations. Further, the nature and extent of
future legislative, regulatory or other changes affecting financial institutions are
impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of
supervision, regulation, and enforcement on the operations of
banks, their holding companies and their affiliates. These laws are intended primarily
for the protection of depositors, clients and the Deposit
Insurance Fund of the FDIC (“DIF”) rather than for stockholders.
This supervisory and regulatory framework subjects banks and bank
holding companies to regular examination by their respective
regulatory agencies, which results in examination reports and
ratings that, while not publicly available, can affect the conduct and growth of
their businesses.
Regulatory Capital Requirements
The federal banking agencies require that banking organizations meet several
risk-based capital adequacy requirements known as the
“Basel III Capital Rules.” The Basel III Capital Rules implement the Basel Committee’s December
2010 framework for strengthening
international capital standards and certain provisions of the Dodd
-Frank Act.
The Basel III Capital Rules require the Company and the Bank to comply with four minimum
capital standards: (i) a tier 1 leverage
ratio of at least 4.0%; (ii) a CET1 to risk-weighted assets of at least 4.5%; (iii) a tier 1
capital to risk-weighted assets of at least 6.0%; and (iv)
a total capital to risk-weighted assets of at least 8.0%. CET1 capital is generally
comprised of common stockholders’ equity and retained
earnings subject to applicable regulatory adjustments. Tier 1 capital is generally
comprised of CET1 and additional tier 1 capital. Additional
tier 1 capital generally includes certain noncumulative perpetual preferred
stock and related surplus and minority interests in equity accounts
of consolidated subsidiaries. We are permitted to include qualifying trust preferred
securities issued prior to May 19, 2010 as additional tier 1
capital. Total capital includes tier 1 capital (CET1 capital plus additional tier 1 capital) and tier 2
capital. Tier 2 capital is generally comprised
of capital instruments and related surplus meeting specified requirements,
and may include cumulative preferred stock and long-term
perpetual preferred stock, mandatory convertible securities, intermediate
preferred stock, and subordinated debt. Also included in tier 2
capital is the allowance for credit losses (“ACL”), formerly known as the allowance
for loan and lease losses (“ALLL”), limited to a
maximum of 1.25% of risk-weighted assets. The calculation of all types of regulatory
capital is subject to deductions and adjustments
specified in the regulations.
The Basel III Capital Rules also establish a “capital conservation buffer” of 2.5%
above the regulatory minimum risk-based capital
requirements. An institution is subject to limitations on certain activities, including payment of dividends, share repurchases
and
discretionary bonuses to executive officers, if its capital level is below the buffered
ratio.
The Basel III minimum capital ratios as applicable to the Bank and to the Company
are summarized in the table below:
Basel III
Minimum For
Capital Adequacy
Purposes
Basel III
Additional
Capital
Conservation
Buffer
Basel III Ratio
With Capital
Conservation
Buffer
Total risk based capital (total capital to risk-weighted assets)
8.00%
2.50%
10.50%
Tier 1 risk based capital (tier 1 to risk-weighted assets)
6.00
2.50
8.50
Common equity tier 1 risk based capital (CET1 to risk-weighted
assets)
4.50
2.50
7.00
Tier 1 leverage ratio (tier 1 to average assets)
4.00%
-%
4.00%
In determining the amount of risk-weighted assets for purposes of calculating
risk-based capital ratios, a banking organization’s assets,
including certain off-balance sheet assets are multiplied by a risk weight factor
assigned by the regulations based on perceived risks inherent
in the type of asset. As a result, higher levels of capital are required for asset categories believed to present greater risk.
As of December 31, 2022, the Company’s and the Bank’s capital ratios exceeded
the minimum capital adequacy guideline percentage
requirements under the Basel III Capital Rules.
Prompt Corrective Action
The Federal Deposit Insurance Act requires federal banking agencies to take “prompt corrective action” with respect
to depository
institutions that do not meet minimum capital requirements. For purposes
of prompt corrective action, the law establishes five capital tiers:
“well-capitalized,” “adequately-capitalized,” “under-capitalized,”
“significantly under-capitalized,” and “critically under-capitalized.” A
depository institution’s capital tier depends on its capital levels and certain other factors established
by regulation. In order to be a “well-
capitalized” depository institution, a bank must maintain a CET1 risk-based
capital ratio of 6.5% or more, a tier 1 risk-based capital ratio of
8% or more, a total risk-based capital ratio of 10% or more and a leverage ratio of
5% or more (and is not subject to any order or written
directive specifying any higher capital ratio). At each successively lower capital category, a bank
is subject to increased restrictions on its
operations.
As of December 31, 2022, the Bank met the requirements for being deemed
“well-capitalized” for purposes of the prompt corrective
action regulations and was not otherwise subject to any order or written directive
specifying any higher capital ratios.
Enforcement Powers of Federal and State Banking
Agencies
The federal banking regulatory agencies have broad enforcement powers,
including the power to terminate deposit insurance, impose
substantial fines and other civil and criminal penalties, and appoint a
conservator or receiver for financial institutions. Failure to comply with
applicable laws and regulations could subject us and our officers and directors to
administrative sanctions and potentially substantial civil
money penalties.
The Company
General
As a bank holding company, the Company is subject to regulation and supervision
by the Federal Reserve under the Bank Holding
Company Act of 1956, as amended (“BHCA”). Under the BHCA, the Company is subject to periodic examination
by the Federal Reserve.
The Company is required to file with the Federal Reserve periodic reports of
its operations and such additional information as the Federal
Reserve may require.
Acquisitions, Activities and
Change in Control
The BHCA generally requires the prior approval by the Federal Reserve for any merger involving a bank holding
company or a bank
holding company’s acquisition of more than 5% of a class of voting securities of
any additional bank or bank holding company or to acquire
all or substantially all the assets of any additional bank or bank holding
company.
Federal law also prohibits any person or company from acquiring “control”
of an FDIC-insured depository institution or its holding
company without prior notice to the appropriate federal bank regulator.
“Control” is conclusively presumed to exist upon the acquisition of
25% or more of the outstanding voting securities of a bank or bank holding company, but
may arise under certain circumstances between 5%
and 24.99% ownership.
Permitted Activities
The BHCA generally prohibits the Company from controlling or engaging in any business other than that of banking,
managing and
controlling banks or furnishing services to banks and their subsidiaries. This general
prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to
own shares of companies engaged in, certain businesses found by the
Federal Reserve prior to November 11, 1999 to be “so closely related to banking
as to be a proper incident thereto.”
Additionally, bank holding companies that meet certain eligibility requirements
prescribed by the BHCA and elect to operate as
financial holding companies may engage in, or own shares in companies engaged
in, a wider range of nonbanking activities, including
securities and insurance underwriting and sales, merchant banking
and any other activity that the Federal Reserve, in consultation with the
Secretary of the Treasury, determines by regulation or order is financial in nature or
incidental to any such financial activity or that the
Federal Reserve determines by order to be complementary to any such financial
activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The Company
has not elected to be a financial holding company, and
we have not engaged in any activities determined by the Federal Reserve to be financial
in nature or incidental or complementary to activities
that are financial in nature.
Source of Strength
Bank holding companies, such as the Company, are required by statute to serve
as a source of financial strength for their subsidiary
depository institutions, by providing financial assistance to their insured depository
institution subsidiaries in the event of financial distress.
Under the source of strength requirement, the Company could be required to provide financial
assistance to the Bank should it experience
financial distress. Furthermore, the Federal Reserve has the right to order
a bank holding company to terminate any activity that the Federal
Reserve believes is a serious risk to the financial safety, soundness or stability of
any subsidiary bank. The regulators may require these and
other actions in support of controlled banks even if such action is not in the best interests of
the bank holding company or its stockholders.
Safe and Sound Banking Practices
Bank holding companies and their nonbanking subsidiaries are prohibited
from engaging in activities that represent unsafe and
unsound banking practices or that constitute a violation of law or regulations.
Under certain conditions the Federal Reserve may conclude
that certain actions of a bank holding company, such as a payment of a cash dividend,
would constitute an unsafe and unsound banking
practice. The Federal Reserve also has the authority to regulate the debt of bank holding companies,
including the authority to impose
interest rate ceilings and reserve requirements on such debt. Under certain
circumstances the Federal Reserve may require a bank holding
company to file written notice and obtain its approval prior to purchasing or redeeming
its equity securities, unless certain conditions are met.
Dividend Payments, Stock Redemptions and Repurchases
The Company’s ability to pay dividends to its stockholders is affected by
both general corporate law considerations and the
regulations and policies of the Federal Reserve applicable to bank holding companies,
including the Basel III Capital Rules. Generally, a
Kansas corporation may declare and pay dividends upon the shares of
its capital stock either out of its surplus, as defined in and computed in
accordance with K.S.A. 17-6404 and 17-6604, and amendments thereto,
or in case there is not any surplus, out of its net profits for the fiscal
year in which the dividend is declared or the preceding fiscal year, or both.
If the capital of the corporation, computed in accordance with
K.S.A. 17-6404 and 17-6604, and amendments thereto, is diminished
by depreciation in the value of its property, or by losses, or otherwise,
to an amount less than the aggregate amount of the capital represented by the issued
and outstanding stock of all classes having a preference
upon the distribution of assets, then no dividends may be paid out of such net profits
until the deficiency in the amount of capital represented
by the issued and outstanding stock of all classes having a preference upon the distribution
of assets shall have been repaired.
It is the Federal Reserve’s policy that bank holding companies should generally
pay dividends on common stock only out of income
available over the past year, and only if prospective earnings retention is consistent
with the organization’s expected future needs and
financial condition. It is also the Federal Reserve’s policy that bank holding
companies should not maintain dividend levels that undermine
their ability to be a source of strength to its banking subsidiaries. Additionally, the Federal Reserve has indicated that bank
holding
companies should carefully review their dividend policy and has discouraged
payment ratios that are at maximum allowable levels unless
both asset quality and capital are very strong.
Bank holding companies must consult with the Federal Reserve before
redeeming any equity or other capital instrument included in
tier 1 or tier 2 capital prior to stated maturity, if such redemption could have a material
effect on the level or composition of the
organization’s capital base. In addition, bank holding companies are unable
to repurchase shares equal to 10% or more of their net worth if
they would not be well-capitalized (as defined by the Federal Reserve) after
giving effect to such repurchase. Bank holding companies
experiencing financial weaknesses, or that are at significant risk of developing
financial weaknesses, must consult with the Federal Reserve
before redeeming or repurchasing common stock or other regulatory
capital instruments.
Other Regulation
As a company whose stock is publicly traded, the Company is subject to various
federal and state securities laws, including the
Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
Sarbanes-Oxley Act of 2002, and the Company files periodic reports with the Securities and Exchange Commission. In
addition, because the
Company’s common stock is listed with The Nasdaq Stock Market LLC, the Company
is subject to the listing rules of that exchange.
The Bank
General
The Bank is a Kansas state-chartered bank and is not a member bank of the Federal
Reserve. As a Kansas state-chartered bank, the
Bank is subject to the examination, supervision and regulation by
the Office of the State Bank Commissioner of Kansas (“OSBCK”), the
chartering authority for Kansas banks, and by the FDIC. The Bank is also subject to certain regulations
of the CFPB.
The OSBCK supervises and regulates all areas of the Bank’s operations including,
without limitation, the making of loans, the
issuance of securities, the conduct of the Bank’s corporate affairs, the satisfaction of
capital adequacy requirements, the payment of
dividends, and the establishment or closing of banking offices. The FDIC is the Bank’s primary
federal regulatory agency, and periodically
examines the Bank’s operations and financial condition and compliance
with federal law. In addition, the Bank’s deposit accounts are insured
by the DIF to the maximum extent provided under federal law and FDIC regulations,
and the FDIC has certain enforcement powers over the
Bank.
Depositor Preference
In the event of the ‘‘liquidation or other resolution’’ of an insured depository institution, the claims of depositors of the institution,
including the claims of the FDIC as subrogee of insured depositors, and
certain claims for administrative expenses of the FDIC as a receiver,
will have priority over other general unsecured claims against the institution. If
an insured depository institution fails, insured and uninsured
depositors, along with the FDIC, will have priority in payment ahead of
unsecured, non-deposit creditors including the parent bank holding
company with respect to any extensions of credit they have made to that
insured depository institution.
Brokered Deposit and Deposit Rate Restrictions
In December of 2020, the FDIC finalized revisions to its regulations relating
to brokered deposits and interest rate restrictions that
apply to less than well-capitalized insured depository institutions. The final rule became
effective April 1, 2021 and full compliance with the
revised brokered deposit regulation was extended to January 1, 2022.
Well-capitalized institutions are not subject to limitations on brokered
deposits, while adequately-capitalized institutions are able to
accept, renew or roll over brokered deposits, only with a waiver from the
FDIC and subject to certain restrictions on the yield paid on such
deposits. Under-capitalized institutions are generally not permitted to
accept, renew, or roll over brokered deposits and are subject to a
deposit rate cap, pursuant to which the institutions would be prohibited from
paying in excess of the higher of (1) 75 basis points above
published national deposit rates or (2) for maturity deposits, 120
percent of the current yield on similar maturity U.S. Treasury obligations
and, for non-maturity deposits, the federal funds rate plus 75 basis points, unless the
FDIC determined that the institutions’ local market rate
was above the national rate. As of December 31, 2022, the Bank was eligible to accept brokered deposits without a waiver from
the FDIC
and was not subject to the deposit rate cap.
Deposit Insurance
As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums
to the FDIC. The FDIC has adopted a risk-
based assessment system whereby FDIC-insured depository
institutions pay insurance premiums at rates based on their risk classification. An
institution’s risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the
regulators. For deposit insurance assessment purposes, an insured depository
institution is placed in one of four risk categories each quarter.
An institution’s assessment is determined by multiplying its assessment
rate by its assessment base. The total base assessment rates range
from 2.5 basis points to 42 basis points. While in the past an insured depository institution’s assessment
base was determined by its deposit
base, amendments to the Federal Deposit Insurance Act revised the assessment base so that it is calculated using average consolidated
total
assets minus average tangible equity.
Additionally, the Dodd-Frank Act altered the minimum designated reserve ratio of the DIF, increasing the minimum
from 1.15% to
1.35% of the estimated amount of total insured deposits, and eliminating
the requirement that the FDIC pay dividends to depository
institutions when the reserve ratio exceeds certain thresholds. The FDIC had until
September 3, 2020 to meet the 1.35% reserve ratio target,
but it announced in November 2018
that the DIF had reached 1.36%, exceeding the 1.35% reserve ratio target. At least semi-annually, the
FDIC updates its loss and income projections for the DIF and, if needed, may increase
or decrease the assessment rates, following notice and
comment on proposed rule-making. However, as of June 30, 2020,
the reserve ratio fell to 1.30%, below the statutory minimum of 1.35%.
On September 15, 2020, the FDIC adopted a Restoration Plan to restore the reserve
ratio to at least 1.35% within eight years. The FDIC
projects that the reserve ratio will return to 1.35% without further action by the
FDIC before the end of that eight-year period, but the FDIC
will closely monitor deposit balance trends, potential losses, and other factors that
affect the reserve ratio. As a result, the Bank’s FDIC
deposit insurance premiums could increase or decrease.
Audit Reports
Since the Bank is an insured depository institution with total assets of $1 billion
or more, financial statements are prepared in
accordance with Generally Accepted Accounting Principles (“GAAP”), management’s certifications signed by the Company's and the Bank’s
chief executive officer and chief accounting or financial officer concerning
management’s responsibility for the financial statements, and an
attestation by the auditors regarding the Bank’s internal controls must be submitted
to the FDIC and OSBCK. The Federal Deposit Insurance
Corporation Improvement Act of 1991 requires that the Bank (or, as explained below, the Company) have
an independent audit committee,
consisting of outside directors who are independent of management of the
Company and the Bank. The audit committee must include at least
two members with experience in banking or related financial management,
must have access to outside counsel and must not include
representatives of large clients. Certain insured depository institutions with total assets of
less than $5 billion, or $5 billion or more and a
composite CAMELS (i.e., capital adequacy, assets, management capability,
earnings, liquidity, sensitivity) rating of 1 or 2, may satisfy these
audit committee requirements if its holding company has an audit committee
that satisfies these requirements. The Company’s audit
committee satisfies these requirements.
Examination Assessments
Pursuant to the Kansas Banking Code, the expense of every regular examination,
together with the expense of administering the
banking and savings and loan laws, including salaries, travel expenses,
supplies and equipment are paid by the banks and savings and loan
associations of Kansas, which are generally allocated among them
based on total asset size.
Capital Requirements
Banks are generally required to maintain minimum capital ratios. For a discussion
of the capital requirements applicable to the Bank,
see “Regulatory Capital Requirements” above.
Bank Reserves
The Federal Reserve requires all depository institutions to maintain reserves
against some transaction accounts (primarily Negotiable
Order of Withdrawal (“NOW”) and Super NOW checking accounts). The balances maintained to meet
the reserve requirements imposed by
the Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal
Reserve “discount window”
as a secondary source of funds if the institution meets the Federal Reserve’s credit standards. The Federal
Reserve reduced the reserve
requirement to 0% effective March 26, 2020.
Dividend Payments
A primary source of funds for the Company is dividends from the Bank. The Bank is not permitted to pay a dividend to the Company
under certain circumstances, including if the Bank is under-capitalized under
the prompt corrective action framework or if the Bank fails to
maintain the required capital conservation buffer. The Kansas Banking Code
also places restrictions on the declaration of dividends by the
Bank to the Company. No dividend may be paid from the capital stock account of
the Bank. The current dividends of the Bank may only be
paid from undivided profits after deducting losses. Before declaring any cash dividend
from undivided profits, the Bank’s board of directors
must ensure that the surplus fund equals or exceeds the capital stock account. If
the surplus fund is less than the capital stock account, the
Bank’s board of directors may transfer 25% of the net profits of the Bank, since the
last preceding dividend from undivided profits, to the
surplus fund, except no additional transfers are required once the surplus fund
equals or exceeds the capital stock account. Any other
dividend (whether in cash or other property) from the Bank to the Company
requires the prior approval of the OSBCK.
The payment of dividends by any financial institution is affected by
the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if,
following payment thereof, the institution would be under-capitalized. As described above, the Bank exceeded
its minimum capital
requirements under applicable regulatory guidelines as of December
31, 2022.
Transactions with Affiliates
The Bank is subject to Sections 23A and 23B of the Federal Reserve Act (the “Affiliates Act”) and the Federal Reserve’s
implementation of Regulation W. An affiliate of a bank under the Affiliates
Act is any company or entity that controls, is controlled by or is
under common control with the bank. Accordingly, transactions between the Company, the Bank and any nonbank
subsidiaries will be
subject to a number of restrictions. The amount of loans or extensions of credit which the Bank
may make to nonbank affiliates, or to third
parties secured by securities or obligations of the nonbank affiliates, are substantially
limited by the Affiliates Act. Such acts further restrict
the range of permissible transactions between a bank and an affiliated company. A bank and its subsidiaries may engage in certain
transactions, including loans and purchases of assets, with an affiliated company
only if the terms and conditions of the transaction, including
credit standards, are substantially the same as, or at least as favorable to the bank as, those prevailing
at the time for comparable transactions
with non-affiliated companies or, in the absence of comparable transactions, on
terms and conditions that would be offered to non-affiliated
companies.
Loans to Directors, Executive Officers and Principal Stockholders
The authority of the Bank to extend credit to its directors, executive officers
and principal stockholders, including their immediate
family members and corporations and other entities they control, is subject to
substantial restrictions and requirements under the Federal
Reserve’s Regulation O, as well as the Sarbanes-Oxley Act.
Limits on Loans to One Borrower
As a Kansas state-chartered bank, the Bank is subject to limits on the amount
of loans it can make to one borrower. With certain
limited exceptions, loans and extensions of credit from Kansas state-chartered
banks outstanding to any borrower (including certain related
entities of the borrower) at any one time may not exceed 25% of the capital of the bank.
Certain types of loans are exempt from the lending
limits, including loans fully secured by segregated deposits held by
the bank or bonds or notes of the United States. A Kansas state-chartered
bank may lend an additional amount if the loan is fully secured by certain types of real
estate. In addition to the single borrower limitation
described above, loans to a borrower and its subsidiaries generally may not exceed
50% of the capital of the bank. The Bank’s legal lending
limit to any one borrower was $176 million as of December 31, 2022.
Safety and Soundness Standards/Risk Management
The federal banking agencies have adopted guidelines establishing
operational and managerial standards to promote the safety and
soundness of federally insured depository institutions. The guidelines set forth standards
for internal controls, information systems, internal
audit systems, loan documentation, credit underwriting, interest rate exposure,
asset growth, compensation, fees and benefits, asset quality
and earnings. In general, the safety and soundness guidelines prescribe the goals to be
achieved in each area, and each institution is
responsible for establishing its own procedures to achieve those goals. If an institution
fails to comply with any of the standards set forth in
the guidelines, the financial institution’s primary federal regulator
may require the institution to submit a plan for achieving and maintaining
compliance. If a financial institution fails to submit an acceptable compliance
plan or fails in any material respect to implement a compliance
plan that has been accepted by its primary federal regulator, the regulator is required
to issue an order directing the institution to cure the
deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator
may restrict the financial institution’s rate of growth,
require the financial institution to increase its capital, restrict the rates the institution
pays on deposits or require the institution to take any
action the regulator deems appropriate under the circumstances. Noncompliance
with the standards established by the safety and soundness
guidelines may also constitute grounds for other enforcement action by
the federal bank regulatory agencies, including cease and desist
orders and civil money penalty assessments.
Community Reinvestment
Act (“CRA”)
The CRA is intended to encourage insured depository institutions, while operating safely and soundly, to help meet the credit needs
of
their communities. The CRA specifically directs the federal bank regulatory agencies, in examining insured depository institutions,
to assess
their record of helping to meet the credit needs of their entire community, including
low and moderate income neighborhoods, consistent
with safe and sound banking practices. The CRA further requires the agencies to take a financial institution’s record of meeting
its
community credit needs into account when evaluating applications for, among
other things, domestic branches, consummating mergers or
acquisitions or holding company formations.
The federal banking agencies have adopted regulations which measure
a bank’s compliance with its CRA obligations on a
performance-based evaluation system. This system bases CRA ratings on an institution’s actual lending service and
investment performance
rather than the extent to which the institution conducts needs assessments, documents
community outreach or complies with other procedural
requirements. The ratings range from a high of “outstanding” to a low of “substantial noncompliance.” The
Bank had a CRA rating of
“satisfactory” as of its most recent CRA assessment.
Anti-Money Laundering and the Office of Foreign
Assets Control Regulation
The Company and the Bank must comply with the requirements of the Bank
Secrecy Act (“BSA”). The BSA
was enacted to prevent
banks and other financial service providers from being used as intermediaries
for, or to hide the transfer or deposit of money derived from,
drug trafficking, money laundering, and other crimes. Since its passage, the BSA has been amended several times. These amendments
include the Money Laundering Control Act of 1986, which made money laundering a criminal act, as well as the Money
Laundering
Suppression Act of 1994, which required regulators to develop enhanced examination procedures and increased
examiner training to improve
the identification of money laundering schemes in financial institutions. The USA Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“PATRIOT Act”), substantially broadened the scope of U.S.
anti-money laundering laws and regulations by imposing significant new
compliance and due diligence obligations, creating new crimes and
penalties and expanding the extra-territorial jurisdiction of the United
States. The regulations impose obligations on financial institutions to
maintain appropriate policies, procedures and controls to detect, prevent,
and report money laundering and terrorist financing. The
regulations include significant penalties for non-compliance. Likewise,
Office of Foreign Assets Control (“OFAC”) administers and enforces
economic and trade sanctions against targeted foreign countries and regimes
under authority of various laws, including designated foreign
countries, nationals and others. OFAC publishes lists of specially designated
targets and countries. Financial institutions are responsible for,
among other things, blocking accounts of and transactions with such
targets and countries, prohibiting unlicensed trade and financial
transactions with them and reporting blocked transactions after their occurrence.
Failure of a financial institution to maintain and implement
adequate anti-money laundering and OFAC programs, or to comply
with all of the relevant laws or regulations, could have serious legal and
reputational consequences for the institution.
Concentrations in Commercial Real Estate (“CRE”)
Concentration risk exists when financial institutions deploy too many assets to any
one industry or segment. Concentration stemming
from CRE is one area of regulatory concern. The CRE Concentration Guidance, provides
supervisory criteria, including the following
numerical indicators, to assist bank examiners in identifying banks with potentially
significant CRE loan concentrations that may warrant
greater supervisory scrutiny: (i) CRE loans exceeding 300% of capital and increasing
50% or more in the preceding three years; or (ii)
construction and land development loans exceeding 100% of capital. The CRE Concentration
Guidance does not limit banks’ levels of CRE
lending activities, but rather guides institutions in developing risk management
practices and levels of capital that are commensurate with the
level and nature of their CRE concentrations. If a concentration is present,
management must employ heightened risk management practices
that address the following key elements: (i) board and management oversight
and strategic planning; (ii) portfolio management; (iii)
development of underwriting standards; (iv) risk assessment and
monitoring through market analysis and stress testing; and (v) maintenance
of increased capital levels as needed to support the level of commercial real estate lending.
On December 18, 2015, the federal banking
agencies jointly issued a ‘‘statement on prudent risk management for commercial
real estate lending’’ reminding financial institutions of
developing risk management practices. See also “Risk Factors-A concentration in commercial real estate lending
could cause our regulators
to restrict our ability to grow” in this Form 10-K.
Consumer Financial Services
The Bank is subject to federal and state consumer protection statutes and regulations
promulgated under those laws, including, without
limitation, regulations issued by the CFPB. These laws and regulations could increase or decrease
the cost of doing business, limit or expand
permissible activities or affect the competitive balance among financial
institutions.
Incentive Compensation Guidance
The federal bank regulatory agencies have issued comprehensive guidance
intended to ensure that the incentive compensation policies
of banking organizations do not undermine the safety and soundness
of those organizations by encouraging excessive risk-taking. The
incentive compensation guidance sets expectations for banking organizations
concerning their incentive compensation arrangements and
related risk management, control and governance processes. The incentive compensation
guidance, which covers all employees that have the
ability to materially affect the risk profile of an organization, either individually
or as part of a group, is based upon three primary principles:
(i) balanced risk-taking incentives; (ii) compatibility with effective controls and
risk management; and (iii) strong corporate governance. Any
deficiencies in compensation practices that are identified may be incorporated
into the organization’s supervisory ratings, which can affect its
ability to make acquisitions or take other actions. In addition, under the incentive
compensation guidance, a banking organization’s federal
supervisor may initiate enforcement action if the organization’s incentive
compensation arrangements pose a risk to the safety and soundness
of the organization. Further, the Basel III capital rules limit discretionary bonus
payments to bank executives if the institution’s regulatory
capital ratios fail to exceed certain thresholds. Although the federal bank regulatory agencies proposed additional rules
in 2016 related to
incentive compensation for all banks with more than $1 billion in assets, those rules
have not yet been finalized. The scope and content of the
U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near
future.
The Dodd-Frank Act requires public companies to include, at least once every three years, a separate non
-binding ‘‘say-on-pay’’ vote
in their proxy statement by which stockholders may vote on the compensation
of the public company’s named executive officers. In addition,
if such public companies are involved in a merger, acquisition, or consolidation,
or if they propose to sell or dispose of all or substantially all
of their assets, stockholders have a right to an advisory vote on any golden
parachute arrangements in connection with such transaction
(frequently referred to as ‘‘say-on-golden parachute’’ vote). Other provisions of the Dodd-Frank Act may impact our corporate governance.
For instance, the SEC adopted rules prohibiting the listing of any equity security of
a company that does not have a compensation committee
consisting solely of independent directors, subject to certain exceptions.
In addition, the SEC adopted rules requiring all exchange-traded
companies to adopt claw-back policies for incentive compensation paid to
executive officers in the event of accounting restatements based on
material non-compliance with financial reporting requirements,
as required under Dodd-Frank. Those rules, however, remain subject to
final
listing standards to be issued by national securities exchanges. Additionally, the Company is an emerging growth
company (“EGC”) under
the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and therefore subject to reduced disclosure requirements related to,
among other things, executive compensation.
Financial Privacy
The federal bank regulatory agencies have adopted rules that limit the ability
of banks and other financial institutions to disclose non-
public information about consumers to non-affiliated third parties. These limitations require
disclosure of privacy policies to consumers and,
in some circumstances, allow consumers to prevent disclosure of
certain personal information to a nonaffiliated third party. These regulations
affect how consumer information is transmitted through financial services companies
and conveyed to outside vendors. In addition,
consumers may also prevent disclosure of certain information among
affiliated companies that is assembled or used to determine eligibility
for a product or service, such as that shown on consumer credit reports and asset and
income information from applications. Consumers also
have the option to direct banks and other financial institutions not to share
information about transactions and experiences with affiliated
companies for the purpose of marketing products or services.
Impact of Monetary Policy
The monetary policy of the Federal Reserve has a significant effect on the operating
results of financial or bank holding companies
and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in
U.S.
government securities, changes in the discount rate on member bank borrowings
and changes in reserve requirements against member bank
deposits. These tools are used in varying combinations to influence overall growth and distribution
of bank loans, investments and deposits,
and their use may affect interest rates charged on loans or paid on deposits.
Other Pending and Proposed Legislation
Other legislative and regulatory initiatives which could affect the Company,
the Bank and the banking industry in general may be
proposed or introduced before the U.S. Congress, the Kansas Legislature and
other governmental bodies in the future. Such proposals, if
enacted, may further alter the structure, regulation and competitive relationship
among financial institutions, and may subject the Company
or the Bank to increased regulation, disclosure and reporting requirements.
In addition, the various banking regulatory agencies often adopt
new rules and regulations to implement and enforce existing legislation.
It cannot be predicted whether, or in what form, any such legislation
or regulations may be enacted or the extent to which the business of the Company
or the Bank would be affected thereby.
Website Access to Company
Reports
The Company’s annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to
those reports are available free of charge on the Company’s website (investors.crossfirstbankshares.com)
as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the SEC. In addition,
copies of the Company’s annual report will be made
available, free of charge, upon written request. The Company does not intend for information
contained in its website to be part of this annual
report on Form 10-K.

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ITEM 1A. RISK FACTORS
ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider
the following factors, which could materially
affect our business, financial condition, results of operations or cash flows in
future periods. While we believe we have identified and
discussed below the key risk factors affecting our business, there may be additional
risks and uncertainties not currently known to us or that
we currently deem to be immaterial that may adversely affect our business, financial
condition, results of operations, cash flows or share
price in the future.
Risks Relating to Our Business and Market
A decline in general business and
economic conditions and any regulatory responses to such conditions
could have a
material adverse effect on our business, financial position, results
of operations and growth prospects.
Our business and operations, which primarily consist of lending money
to clients in the form of loans and borrowing money from
clients in the form of deposits, are sensitive to general economic conditions,
particularly in Kansas, Missouri, Oklahoma, Texas,
Arizona,
Colorado and New Mexico.
Unfavorable or uncertain economic and market conditions, including slowing
or recessionary economic
conditions, may constrain our growth and profitability from our lending
and deposit operations, lead to credit quality concerns related to
borrower repayment ability and collateral protection and reduce demand
for the products and services we offer. Increases in inflation can
adversely
affect the value of our investment securities, increase the costs of our business operations
and adversely affect the ability of our
clients to repay their loans with us. The annual inflation rate in the United States has increased since 2021.
Our business is also significantly
affected by monetary and other regulatory policies, which are influenced by
macroeconomic conditions and other factors beyond our control.
The Federal Reserve Board has increased the target federal funds rate several
times beginning in 2022. Uncertainty surrounding the federal
fiscal policymaking process, the medium and long-term fiscal outlook of
the federal government and future tax rates are concerns for
businesses, consumers and investors. Adverse economic conditions and governmental policy responses to
such conditions could have a
material adverse effect on our business, financial position, results of operations
and growth prospects.
Our profitability depends on interest rates generally, and we may be adversely
affected by changes in market interest rates.
Our profitability depends in substantial part on our net interest income, which
depends on many factors that are partly or completely
outside of our control, including competition, economic conditions and
monetary and fiscal policies. Since March 2022, in response to
inflation, the target range for the federal funds rate has been steadily increasing.
As it seeks to control inflation without creating a recession,
the Federal Reserve has indicated further increases are expected.
If the targeted federal funds rates are increased, overall interest rates will
likely continue to rise, which will positively impact our net interest income
but may negatively impact our ability to originate loans and
deposits, reduce the carrying value of assets on our consolidated statements of
financial position, reduce the value and marketability of loan
collateral and create higher payment burdens for our borrowers (which may
increase potential for default). The ratio of variable- to fixed-rate
loans in our loan portfolio, the ratio of short-term (maturing at a given
time within 12 months) to long-term loans and the ratio of our
demand, money market and savings deposits to certificates of deposit (and their
time periods) are the primary factors affecting the sensitivity
of our net interest income to changes in market interest rates. Our ability
to attract and maintain deposits, as well as our cost of funds, has
been and will continue to be significantly affected by general economic
conditions. In addition, as market interest rates rise, we will continue
to have competitive pressure to increase the rates we pay on deposits. If we continue
to increase interest rates paid to retain deposits, our
earnings may be adversely affected. Fluctuations in
market rates and other market disruptions are neither predictable nor controllable
and
may adversely affect our financial condition, earnings and results of operation
s. Stockholders' equity, specifically accumulated other
comprehensive income (loss) ("AOCI"), is increased or decreased by the amount
of change in the estimated fair value of our securities
available-for-sale, net of deferred income taxes. Increases in long term
interest rates generally decrease the fair value of securities available-
for-sale, which adversely impacts stockholders' equity.
We may not be able to implement aspects of our growth strategy, which
may adversely affect our ability to maintain our
historical earnings trends.
We may not be able to sustain our growth at the rate we have enjoyed during
the past several years, which has been driven primarily
by new market expansion, the strength of commercial and industrial and
real estate lending in our market areas and our ability to identify and
attract high caliber experienced banking talent. A downturn in local economic market conditions, our failure to attract and retain high
performing personnel and the inability to attract core funding and quality
lending clients, among other factors, could limit our ability to grow
at the rate we have in the past. Additionally, expenses may grow at a greater rate than revenues. Consequently, our historical results of
operations will not necessarily be indicative of our future operations. Any limitation on our ability to grow
may have a negative effect on our
business, financial condition and results of operations.
We may not be able to manage the risks associated with our anticipated growth
and expansion through de novo branching,
mergers and acquisitions, new lines of business, or new offerings
of services, products or product enhancements.
If our business continues to grow as anticipated, we may become more susceptible
to risks related to both general growth and specific
areas of growth. Generally, risks are associated with attempting to maintain
effective financial and operational controls as we grow, such as
maintaining appropriate loan underwriting and credit monitoring
procedures, maintaining an adequate allowance for loan losses, controlling
concentrations and complying with regulatory or accounting requirements. Such
risks may result in, among other effects, increased loan
losses, reduced earnings, potential regulatory penalties and future restrictions
on growth. We may also be exposed to certain risks associated
with the specific components of our growth strategy, as discussed in more detail
below.
Expansion through De Novo Branching
: Our growth strategy includes evaluating opportunities to grow
through de novo branching.
De novo branching carries with it certain potential risks, including
significant startup costs and anticipated initial operating losses; an
inability to gain regulatory approval; an inability to hire or retain qualified
senior management to successfully operate the branch and
integrate our corporate culture; challenges associated with securing attractive
locations at a reasonable cost; poor market reception in
locations where we do not have a preexisting reputation; unfavorable
local economic conditions; and the additional strain on management
resources and internal systems and controls.
Mergers and Acquisitions
: As part of our growth strategy, we may continue to pursue mergers and acquisitions of banks and non-
bank financial services companies within or outside our principal market
areas. Mergers and acquisitions, including our recently completed
acquisition of Farmers & Stockmens Bank, involve numerous risks associated
with entry into new markets or locations; integration and
management of the combined entities; diversion of financial and management
resources from existing operations; assumption of
unanticipated problems, such as non-performing loans and latent liabilities; unanticipated
costs; and potential future impairments to goodwill
and other intangible assets. If we finance acquisitions by issuing convertible debt
or equity securities, our existing stockholders may be
diluted, which could affect the market price of our common stock. As a condition to receiving regulatory approval, we may
also be required
to sell banking locations, which may not be preferable or may reduce the benefit
of the acquisition. The failure to obtain these regulatory
approvals could impact our business plans and restrict our growth.
New Lines of Business, Services, Products or Product Enhancements
: From time to time, we may implement or acquire new lines
of business or offer new services, products or product enhancements. There are
substantial risks and uncertainties associated with developing,
implementing and marketing such offerings, including significant investment
of financial and other resources, inability to accurately estimate
price and profitability targets, failure to realize expected benefits, regulatory
compliance and shifting market preferences.
Failure to adequately manage any of the preceding risks could have an adverse effect
on our business, financial condition and results
of operations.
Phase-out of the London Inter-Bank Offered Rate (“LIBOR”) and uncertainty
relating to alternative reference rates may
adversely affect our results of operations.
LIBOR is used extensively as a reference rate for various financial contracts,
including adjustable-rate loans, asset-backed securities
and interest rate swaps. In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced
that it intends
to stop persuading or compelling banks to submit LIBOR rates after 2021,
which date was later extended to June 30, 2023. Accordingly,
continuation of LIBOR cannot be guaranteed after June 30, 2023 and alternative
reference rates must be established. Regulators, industry
groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things,
published recommended fallback
language for LIBOR-linked financial instruments, identified recommended
alternatives for certain LIBOR rates (e.g., the Secured Overnight
Financing Rate (“SOFR”) as the recommended alternative to U.S. Dollar
LIBOR), and proposed implementations of the recommended
alternatives in floating rate instruments. Management continues to
evaluate the impact of this transition as it relates to new and existing
contracts and clients and has included fallback language in new loan documents
since 2017. Starting in 2021, we no longer use LIBOR on
new loans.
Uncertainty as to the nature and effect of such reforms
and actions may adversely affect our financial condition or results of
operations, including the value of, return on and trading market for our
financial assets and liabilities that are based on or are linked to
benchmarks, including any LIBOR-based securities, loans and derivatives.
Furthermore, there can be no assurances that we and other market
participants will be adequately prepared for an actual discontinuation
of benchmarks, including LIBOR, that may have an unpredictable
impact on contractual mechanics (including, but not limited to, interest rates
to be paid to or by us), which may also result in adversely
affecting our financial condition or results of operations.
Such transition may also result in litigation with counterparties impacted by
the
transition as well as increased regulatory scrutiny and other adverse
consequences. In addition, any replacement benchmark ultimately
adopted as a substitute for LIBOR, including SOFR, may behave differently
than LIBOR in a manner detrimental to our financial
performance. At December 31, 2022, $0.7 billion of our loans were tied to
LIBOR.
The fair value of our investment securities can fluctuate due to factors
outside of our control.
As of December 31, 2022, 2021 and 2020, the fair value of our investment securities
portfolio was approximately $687 million,
$746 million and $655 million, respectively. Factors beyond our
control can significantly influence the fair value of securities in our portfolio
and may cause potential adverse changes to the fair value of these securities. These factors include,
but are not limited to, rating agency
actions, defaults by the issuer or with respect to the underlying securities, changes
in market interest rates and instability in the capital
markets. In addition, our inability to accurately predict the future performance
of an issuer or to efficiently respond to changing market
conditions could result in a decline in the value of our investment securities portfolio.
These and other factors could cause realized or
unrealized losses in future periods and declines in other comprehensive
income and the value of our common stock, any of which could
materially and adversely affect our business, results of operations, financial
condition and prospects.
Our business is highly susceptible to credit risk.
There are risks inherent in making any loan, including risks inherent in dealing
with individual borrowers, risks of non-payment, risks
resulting from uncertainties as to the future value of collateral and risks resulting from
changes in economic and industry conditions. There is
no assurance that our loan approval and credit risk monitoring procedures
are or will be adequate to reduce the inherent risks associated with
lending. Our credit administration personnel and our policies and procedures
may not adequately adapt to changes in economic or any other
conditions affecting clients and the quality of our loan portfolio.
Similarly, we have credit risk embedded
in our securities portfolio.
Adverse
credit factors could result in higher delinquencies and greater charge
-offs or losses in future periods which could materially and
adversely
impact us.
We have credit exposure to the energy industry.
We have credit exposure to the energy industry in each of our primary markets and
across the United States. A
downturn or lack of
growth in the energy industry and energy-related business could adversely
affect our clients which may lead to higher delinquencies and
greater charge-offs in future periods. Prolonged or further pricing
pressure on oil and gas could lead to increased credit stress in our energy
portfolio, increased losses associated with our energy portfolio, increased
utilization of our contractual obligations to extend credit and
weaker demand for energy lending. Such a decline or general uncertainty resulting
from continued volatility could have other adverse
impacts that are difficult to isolate or quantify, all of which could have a material
adverse effect on us. Additionally, to the extent that climate
change and responses to climate change negatively impact the businesses and
financial condition of our clients in the energy industry, the
credit risk associated with loans and other credit exposures to those clients may
increase.
A concentration in commercial real
estate lending could cause our regulators to restrict our ability to
grow.
As a part of their regulatory oversight, the federal regulators have issued guidance
on Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices (the “CRE Concentration Guidance”)
with respect to a financial institution’s concentrations in
CRE lending activities. Such guidance identifies certain concentration
levels that, if exceeded, will expose an institution to additional
supervisory analysis
The guidelines identify the following as preliminary indications of possible CRE
concentration risk: (i) the institution’s
total construction, land development and other land loans represent 100% or
more of total capital and reserves; or (ii) total CRE loans as
defined in the guidance, or Regulatory CRE, represent 300% or more of the institution’
s
total capital and reserves and the institution’s
Regulatory CRE has increased by 50% or more during the prior 36-month period. We believe
that the CRE Concentration Guidance is
applicable to us. Our CRE portfolio was 318%
of total capital and reserves at December 31, 2022. The FDIC or other federal regulators may
become concerned about our CRE loan portfolio and they could limit our ability
to grow by restricting approvals of new branches and other
growth opportunities or by requiring us to raise additional capital, reduce our
loan concentrations or undertake other remedial actions.
Many of our loans are to commercial borrowers, which have a higher
degree of risk than other types of loans.
As of December 31, 2022, approximately 87% of our loan portfolio
related to commercial-based lending. Commercial purpose loans
are often larger and involve greater risks than other types of lending. Repayment
of these loans often depends on the successful operation or
development of the property or business involved and are highly sensitive to
adverse conditions in the real estate market or the industry in
which the business operates or the general economy. Accordingly, a downturn in the real estate market or other industry
in which the business
operates or the general economy could impair the borrowers’ ability to repay and heightens our risk related to commercial purpose
loans,
particularly CRE loans. Losses incurred on a small number of commercial
purpose loans could have a material adverse impact on our
financial condition and results of operations due to the larger-than-average
size of each commercial purpose loan and collateral that is
generally less readily-marketable.
Because a portion of our loan portfolio is comprised of real estate
loans, negative changes in the economy affecting real
estate values could impair the value of collateral securing our real
estate loans and result in loan and other losses.
Adverse changes affecting real estate values or operating cash flows of
real estate, particularly in the markets in which we operate,
could increase the credit risk associated with our loan portfolio and could
result in losses that adversely affect credit quality and our financial
condition and results of operation. Market value of real estate can fluctuate
significantly in a short period of time. Negative changes in the
economy affecting real estate values or operating cash flows in our market
areas could significantly impair the value and marketability of
property pledged loan collateral and may require us to increase our allowance
for loan losses, any of which could have a material adverse
impact on our business, results of operations and growth prospects.
Our largest loan relationships make up a significant percentage of
our total loan portfolio.
As of December 31, 2022, our 25 largest borrowing relationships totaled approximately
$1.9 billion in total commitments
(representing, in the aggregate, 24% of our total outstanding commitments
as of December 31, 2022). Our five largest borrowing
relationships, based on total commitments, accounted for 9% of total commitments
as of December 31, 2022. This concentration of
borrowers may expose us to material losses if one or more of these relationships
becomes delinquent or suffers default. The allowance for
loan losses may not be adequate to cover such losses and any loss or increase in the allowance
would negatively affect our earnings and
capital. Even if these loans are adequately collateralized, an increase in classified
assets could harm our reputation with our regulators and
inhibit our ability to execute our business plan.
A portion of our loan portfolio
is comprised of participation and syndicated transaction interests, which
could have an
adverse effect on our ability to monitor the lending relationships and lead
to an increased risk of loss.
As of December 31, 2022, we had $68 million of purchased loan participations
from other financial institutions and a combination of
shared national credits and syndication interests purchased totaling $440
million. Although we comply with our general underwriting criteria
on these loan participations and syndicated loans, these loans may have
a higher risk of loss than loans we originate and administer.
In such
transactions in which we are not the lead lender, we rely in part on the lead lender or
the agent, as the case may be, to monitor the
performance of the loan and provide information that we use to classify the loan and
associated loan loss provisions. If our underwriting or
monitoring of these loans is not sufficient, our non-performing loans may increase
and our earnings may decrease.
Our levels of non-performing assets could increase, which would adversely
affect our results of operations and financial
condition and could result in losses in the future.
As of December 31, 2022, our non-performing loans (which consist of non-accrual
loans, loans past due 90 days or more and still
accruing interest and loans modified under troubled debt restructurings that are
not performing in accordance with their modified terms)
totaled $12 million and our non-performing assets (which include
non-performing loans plus other real estate owned) totaled $13 million.
However, we can give no assurance that our non-performing assets will continue
to remain at these levels and we may experience increases
in non-performing assets in the future. Non-performing assets adversely
affect our management resources, net income, risk profile and
capital maintenance levels, efficiency ratio and returns on assets and equity, any
of which may adversely affect us.
Our allowance may not be adequate to cover actual credit losses on
loans.
A significant source of risk arises from the possibility that we could sustain losses due to loan defaults and non-performance on
loans.
We maintain an allowance in accordance with GAAP to provide for such defaults and other non-performance. The amount of
future losses is
susceptible to changes in economic, operating and other conditions, including
changes in interest rates and inflationary or recessionary
trends,
many of which are beyond our control. We early adopted the Current Expected Credit Losses
(“CECL”) model on January 1, 2022;
under CECL, we are required to use historical information, current conditions
and reasonable forecasts to estimate the expected loss over the
life of the loan. Our underwriting policies, adherence to credit monitoring processes and
risk management systems and controls may not
prevent unexpected losses. Our allowance may not be adequate to cover
actual loan losses. Moreover, any increase in our allowance will
adversely affect our net income and regulatory capital.
We rely on our senior management team and may have difficulty
identifying, attracting and retaining necessary personnel,
which may divert resources and limit our ability to execute our business
strategy and successfully grow our business.
Our continued growth and successful operation of our business depends,
in large part, on our ability to hire and retain highly qualified
and motivated personnel at every level. Our senior management team has
significant industry experience,
and their knowledge and
relationships would be difficult to replace in the event of departure or retirement
.
We must also hire and retain qualified banking personnel to
continue to grow our business. Competition for skilled personnel in
the financial services and banking industry is significant and costs
associated with incenting and retaining skilled personnel may be material
and continue to increase. If we are unable to hire and retain
qualified personnel or successfully address management succession issues, we may
be unable to successfully execute our business strategy
and manage our growth, which could have a material adverse effect on our
business, financial condition or results of operations.
We rely on short-term funding, which can be adversely affected by local and
general economic conditions.
As of December 31, 2022, approximately
$5 billion, or 83%, of our deposits consisted of demand, savings, money market and
transaction accounts (including negotiable order of withdrawal accounts). The
approximately $1 billion remaining balance of deposits
consisted of certificates of deposit, of which approximately $589 million, or
10% of our total deposits, was due to mature within one year.
Based on our experience, we believe that our savings, money market and
non-interest-bearing accounts are relatively stable sources of funds.
Our ability to attract and maintain deposits, as well as our cost of funds, has been
and will continue to be significantly affected by general
economic conditions. In addition, as market interest rates rise, we will continue
to have competitive pressure to increase the rates we pay on
deposits. If we continue to increase interest rates paid to retain deposits, our earnings
may be adversely affected.
Our largest deposit relationships currently make up a significant percentage
of our deposits and the withdrawal of deposits
by our largest depositors could force us to fund our business through
more expensive and less stable sources.
At December 31, 2022, our 25 largest depositors accounted for 25% of our total
deposits and our five largest depositors accounted for
12% of our total deposits. Withdrawals of deposits by any one of our largest depositors
or by one of our related client groups could force us
to rely more heavily on borrowings and other sources of funding to meet business and
withdrawal demands, adversely affecting our net
interest margin and results of operations. Such circumstances may require
us raise deposit rates to attract new deposits and rely more heavily
on other funding sources that could be more expensive and less stable. Under applicable
regulations, if the Company was no longer “well-
capitalized,” we would be required to obtain FDIC approval to accept
brokered deposits and could also be subject to a deposit rate cap
prohibiting us from paying in excess of 75 basis points above national deposit rates.
Liquidity risk could impair our ability to fund operations and meet our
obligations as they become due and failure to
maintain sufficient liquidity could materially adversely affect our growth,
business, profitability and financial condition.
Liquidity is essential to our business, sufficient levels of which are required to
fund asset growth, serve client demand for loans, pay
our debt obligations and meet other cash commitments. Liquidity risk is the potential
that we will be unable to meet our obligations as they
come due because of an inability to liquidate assets or obtain adequate
funding without adverse conditions or consequences. Liquidity risk
can increase due to a number of factors, including an over-reliance on a particular
source of funding, market-wide phenomena such as market
dislocation and major disasters and a high concentration of large depositors
.
The Bank’s primary funding source is client deposits. Other
sources of funding may include advances from the Federal Home Loan Bank (“FHLB”),
the Federal Reserve Bank of Kansas City (“FRB”)
and our acquisition of brokered deposits, internet subscription certificates of deposit
and reciprocal deposits through the Intrafi Network.
Although the Bank has historically been able to replace maturing deposits
and advances as necessary, it might not be able to replace such
funds in the future. An inability to raise funds through deposits, borrowings, the sale of loans, securities and other sources could
have a
substantial negative effect on liquidity. Any substantial, unexpected or prolonged change in the level or cost of liquidity
could have a material
adverse effect on our financial condition and results of operations and could
impair our ability to fund operations and meet our obligations as
they become due and could jeopardize our financial condition.
We may not be able to maintain sufficient capital in the future, which
may adversely affect our financial condition, liquidity,
results of operations and our ability to maintain regulatory compliance.
Our business strategy calls for continued growth. We may need to raise additional capital
in the future to support our continued
growth and to maintain our required regulatory capital levels. Our ability
to raise additional capital depends on conditions in the capital
markets, economic conditions and a number of other factors, including investor
perceptions regarding the banking industry, market
conditions and governmental activities, our financial condition and performance
and competition with other financial institutions for capital
sources. We cannot guarantee that we will be able to raise additional capital in the future
on acceptable terms, which may adversely affect our
liquidity, growth strategy, financial condition and results of operations.
We face strong competition from banks, credit unions, financial
technology or Fintech companies and other financial
services providers that offer banking services, which may limit our ability
to attract and retain banking clients.
Competition in the banking industry generally, and in our primary markets
specifically, is intense. Competitors include banks and
other financial services providers, such as savings and loan institutions, brokerage
firms, credit unions, mortgage banks and other financial
intermediaries. In particular, we compete with larger national and regional
financial institutions, whose greater resources afford them many
competitive advantages.
Such resources may enable our competitors to achieve larger economies of
scale; offer more services; spend more
on advertising and technological investments; offer better lending rates to
clients; better diversify their loan portfolio; and have less
vulnerability to downturns in local economies and real estate markets.
If we are unable to offer competitive products and services as quickly
as our larger competitors, our business may be negatively affected. We also compete
against community banks, credit unions and nonbank
financial services companies with strong local ties to small- and
medium-sized businesses that we target, and we may be unable to attract and
retain such clients as effectively as these smaller competitors.
Additionally, we face growing competition from so-called “online
businesses”
with few or no physical locations, including financial technology companies,
online banks, lenders and consumer and commercial
lending
platforms and automated retirement and investment service providers
.
New technology and other changes increasingly allow parties to
effectuate online financial transactions with little to no involvement from
banks, including bill payment, funds transfers and maintenance of
funds in brokerage accounts or mutual funds that would have historically been
held as bank deposits.
The process of eliminating banks as
intermediaries, known as “disintermediation,” could reduce our
income from fees and deposits. Ultimately, we may be unable to compete
successfully against current and future competitors, which may reduce
our revenue stream and prevent us from growing our loan and deposit
portfolios, any of which may adversely affect our results of operations and financia
l
condition.
Our risk management framework may not be effective in mitigating
risks or losses to us, and we may incur losses due to
ineffective risk management processes and strategies.
Our risk management framework is comprised of various processes, systems and
strategies designed to manage our risk exposure,
including credit, liquidity, interest rate, price, operational, reputation,
strategic and compliance risks. Our framework also includes financial
or other modeling methodologies that involve highly subjective management
assumptions and judgment. Our risk management framework
may not be effective under all circumstances and may not adequately mitigate
risks or losses, which could result in adverse regulatory
consequences and unexpected losses and our business, financial condition,
results of operations or growth prospects could be materially and
adversely
affected. We may also be subject to potentially adverse regulatory consequences.
We are required to make significant judgments, assumptions and
estimates in the preparation of our financial statements and
our judgments, assumptions and estimates may not be accurate.
The preparation of financial statements and related disclosures in conformity
with GAAP requires us to make judgments, assumptions
and estimates that affect the amounts reported in our consolidated financial
statements and accompanying notes. Our critical accounting
policies and estimates, which are included in the section captioned “Management’s
Discussion and Analysis of Financial Condition and
Results of Operations,” describe those significant accounting policies and
estimates used in the preparation of our consolidated financial
statements that we consider “critical” because they require judgments,
assumptions and estimates that materially affect our consolidated
financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ
significantly
from the judgments, assumptions and estimates in our critical accounting
policies and estimates, those events or regulatory views could have
a material impact on our consolidated financial statements and related disclosures,
in each case resulting in our need to revise or restate prior
period financial statements, cause damage to our reputation and the price
of our common stock and adversely affect our business, financial
condition and results of operations.
If we fail to maintain effective internal control over financial reporting,
we may not be able to report accurate and timely
financial results, which may cause material harm to our business.
Our management team is responsible for establishing and maintaining
adequate internal control over financial reporting and for
evaluating and reporting on that system of internal control. Our internal
control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in
accordance with GAAP. As a public company, we are required to comply with the Sarbanes-Oxley Act and other rules that govern public
companies. Unless we remain an emerging growth company, our independent
registered public accounting firm may be required to provide
an attestation report on the effectiveness of our internal control over financial reporting. We will continue
to periodically test and update, as
necessary, our internal control systems, including our financial reporting
controls. Our actions, however, may not be sufficient to result in an
effective internal control environment,
and any future failure to maintain effective internal control over financial reporting could
impair the
reliability of our financial statements which in turn could harm our business, impair
investor confidence in the accuracy and completeness of
our financial reports and our access to the capital markets, cause the price of
our common stock to decline and subject us to regulatory
penalties.
Failure to keep pace with technological change could adversely affect
our business.
Advances and changes in technology could significantly affect our business, financial
condition, results of operations and future
prospects. The financial services industry is continually undergoing rapid technological
change with frequent introductions of new
technology-driven products and services. Failure to successfully keep pace
with technological change affecting our industry could harm our
ability to compete effectively. Many of our competitors have substantially
greater resources to invest in technological improvements. We face
many challenges, including the increased demand to provide clients electronic
access to their accounts and the cost and implementation of
systems to perform electronic banking transactions. Our ability to compete
depends on our ability to continue to adapt technology on a timely
and cost-effective basis to meet these demands. We may not be able to effectively or timely
implement new technology-driven products and
services or be successful in marketing these products and services to our clients. As these technologies are improved
in the future, we may be
required to make significant capital expenditures in order to remain competitive,
which may increase our overall expenses and have a
material adverse effect on our business, financial condition, results of operations
and cash flows.
We are exposed to cybersecurity threats and potential security breaches
and our efforts to minimize or respond to such
threats may not be effective to prevent significant harm to the Company.
We conduct a portion of our business over the Internet. We rely heavily upon data processing,
software, communications and
information systems from a number of third parties to conduct our business. Our
business involves the storage and transmission of clients’
proprietary information and security breaches could expose us to the risk
of loss or misuse of such information, litigation and potential
liability. Our operations are vulnerable to disruptions from human
error, natural disasters, power loss, computer viruses, spam attacks, denial
of service attacks, unauthorized access and other unforeseen events.
Undiscovered data corruption could render our client information
inaccurate. Third-party or internal systems and networks may fail to operate
properly or become disabled due to deliberate attacks or
unintentional events. Security breaches and cyberattacks
may cause significant increases in operating costs, including the costs of
compensating clients for any resulting losses they may incur and the
costs and capital expenditures required to correct the deficiencies in and
strengthen the security of data processing and storage systems.
While we believe we are in compliance with all applicable privacy and data security
laws, an incident could put our client’s
confidential information at risk and expose us to significant liability. We
have been the target of data and cyber security attacks and
may
experience attacks in the future. While we have not experienced a material cyber-incident
or security breach that has been successful in
compromising our data or systems to date, we can never be certain that all of our
systems are entirely free from vulnerability to breaches of
security or other technological difficulties or failures. The
perpetual evolution of known cyber-threats requires us to devote significant
resources to maintain, regularly update and backup our data security
systems and processes, as we may not be able to anticipate, or
effectively implement preventative measures against, all cyber-attacks. A security breach or other cyber-incident could have an adverse
impact on, among other things, our revenue, ability to attract and maintain
clients and our reputation. In addition, a security breach could also
subject us to additional regulatory scrutiny and expose us to civil litigation and
possible financial liability, all of which could have a material
adverse effect on our business, financial condition, results of operations,
system availability and operational support.
We rely on client, counterparty and third-party information, which subjects
us to risks if that information is not accurate or
is incomplete.
In deciding whether to extend credit or enter into other transactions with clients and
counterparties, we rely on information furnished
to us by or on behalf of clients and counterparties, including financial statements and
other financial information. We also rely on
representations of clients and counterparties as to the accuracy and completeness
of that information and, with respect to financial statements,
on reports of independent auditors. While we have a practice of seeking to independently verify
client information that we use in deciding
whether to extend credit or to agree to a loan modification, including employment,
assets, income and credit score, not all client information
is independently verified and if any of the information that is independently
verified (or any other information considered in the loan review
process) is misrepresented and such misrepresentation is not detected prior
to loan funding, the value of the loan may be significantly lower
than expected. Whether a misrepresentation is made by the applicant, another third party
or one of our employees, we generally bear the risk
of loss associated with the misrepresentation. We may not detect all misrepresented information
in our approval process. Any such
misrepresented information could adversely affect our business, financial condition
and results of operations.
We are subject to certain operating risks related to employee error and
client, employee and third-party misconduct, which
could harm our reputation and business.
Employee error or employee and client misconduct could subject us to financial
losses or regulatory sanctions and seriously harm our
reputation. Misconduct by our employees could include hiding unauthorized
activities from us, improper or unauthorized activities on behalf
of our clients or improper use of confidential information. It is not always possible to
prevent employee error or misconduct and the
precautions we take to prevent and detect this activity may not be effective in
all cases. Because the nature of the financial services business
involves a high volume of transactions, certain errors may be repeated
or compounded before they are discovered and successfully rectified.
Our necessary dependence upon processing systems to record and process
transactions and our large transaction volume may further increase
the risk that employee errors, tampering or manipulation of those systems will result in losses
that are difficult to detect. Employee error or
misconduct could also subject us to financial claims. If our internal control
systems fail to prevent or detect an occurrence, it could have a
material adverse effect on our business, financial condition and results of operations.
Fraudulent activity could damage our reputation, disrupt our businesses,
increase our costs and cause losses.
As a financial institution, we are inherently exposed to operational risk in the form of
theft and other fraudulent activity by employees,
clients and other third parties targeting us and our clients or data. Such activity
may take many forms, including check fraud, electronic fraud,
wire fraud, phishing, social engineering and other dishonest acts. Although the Company devotes substantial resources
to maintaining
effective policies and internal controls to identify and prevent such incidents,
given the increasing sophistication of possible perpetrators, the
Company may experience financial losses or reputational harm as a result of
fraud. In addition, we may be required to make significant
capital expenditures in order to modify and enhance our protective measures or
to investigate and remediate fraudulent activity. Although we
have not experienced any material business or reputational harm as a result of fraudulent
activities in the past, the occurrence of fraudulent
activity could damage our reputation, disrupt our business, increase
our costs and cause losses in the future.
Our operations could be interrupted if our third-party service providers
experience difficulty, terminate their services or fail
to comply with banking regulations.
We depend, to a significant extent, on a number of relationships with third-party
service providers. Specifically, we receive core
systems processing, essential web hosting and other internet systems, loan
and deposit processing and other processing services from third-
party service providers. If these third-party service providers experience
financial, operational or technological difficulties or terminate their
services and we are unable to replace them with other service providers,
our operations could be interrupted. If an interruption were to
continue for a significant period of time, our business, financial condition
and results of operations could be adversely affected, perhaps
materially. Even if we are able to replace our service providers, it may be at a higher
cost to us, which could adversely affect our business,
financial condition and results of operations.
We follow a relationship-based operating model and negative public opinion
could damage our reputation and adversely
impact our earnings.
Reputation risk, or the risk to our business, earnings and capital from negative
public opinion, is inherent in our business. Negative
public opinion can result from our actual or alleged conduct in any number
of activities, including lending practices, corporate governance,
acquisitions, and from actions taken by government regulators and community
organizations in response to those activities. Negative public
opinion can adversely affect our ability to keep and attract clients and employees
and can expose us to litigation and regulatory action and
adversely affect our results of operations. Although we take steps to minimize reputation risk in dealing with our
clients and communities,
this risk will always be present given the nature of our business.
If third parties infringe upon our intellectual property or if we were
to infringe upon the intellectual property of third parties,
we may expend significant resources enforcing or defending our rights or
suffer competitive injury.
We rely on a combination of copyright, trademark, trade secret laws and confidentiality
provisions to establish and protect our
intellectual property rights. If we fail to successfully maintain, protect and
enforce our intellectual property rights, our competitive position
could suffer. Similarly, if we were to infringe on the intellectual property rights of
others, our competitive position could suffer. Third parties
may challenge, invalidate, circumvent, infringe or misappropriate our
intellectual property, or such intellectual property may not be sufficient
to permit us to take advantage of current market trends or otherwise to provide
competitive advantages, which could result in costly redesign
efforts, discontinuance of certain product or service offerings or other
competitive harm.
We may also be required to spend significant resources to monitor and police our
intellectual property rights. Some of our competitors
may independently develop similar technology, duplicate our products
or services or design around our intellectual property and in such
cases we may not be able to assert our intellectual property rights against such parties.
Further, our contractual arrangements may not
effectively prevent disclosure of our confidential information or provide
an adequate remedy in the event of unauthorized disclosure of our
confidential or proprietary information. We may have to litigate to enforce or determine
the scope and enforceability of our intellectual
property rights, trade secrets and know-how, which could be time-consuming
and expensive, could cause a diversion of resources and may
not prove successful. The loss of intellectual property protection or the inability
to obtain rights with respect to third-party intellectual
property could harm our business and ability to compete. In addition, because
of the rapid pace of technological change in our industry,
aspects of our business and our products and services rely on technologies developed
or licensed by third parties and we may not be able to
obtain or continue to obtain licenses and technologies from these third parties on reasonable
terms or at all.
We may be exposed to risk of environmental liabilities or failure to comply with
regulatory requirements with respect to
properties to which we take title.
In the course of our business, we may foreclose and take title to real estate and
these properties could subject us to environmental
liabilities and other federal, state or local regulatory requirements, such as the Americans with Disabilities Act. We do not know whether
existing requirements will change or whether compliance with future requirements
will involve significant expenditures. We may be held
liable to a governmental entity or to third parties for property damage, personal
injury, investigation and clean-up costs incurred by these
parties in connection with environmental contamination, or we may be
required to investigate or clean up hazardous or toxic substances, or
chemical releases at a property. The costs associated with these investigation or remediation
activities could be substantial. In addition, if we
are the owner or former owner of a contaminated site, we may be subject to claims and
damages from third parties related to environmental
contamination emanating from the property. In addition, we could be
required to cure deficiencies with local building codes, requirements
under the Americans with Disabilities Act, or other federal, state or local property regulation requirements. If we ever become subject to
significant environmental liabilities or costs or fail to comply with regulatory requirements
with respect to these properties, our business,
financial condition, liquidity and results of operations could be materially
and adversely affected.
The costs and effects of litigation, regulatory actions, investigations
or similar matters, or adverse facts and developments
related thereto, could materially affect our business, operating results
and financial condition.
We may be involved from time to time in a variety of litigation, investigations or
similar matters arising out of our business. It is
inherently difficult to assess the outcome of these matters and we may
not prevail in proceedings or litigation. Insurance may not cover all
such claims or losses, our indemnification rights may not be honored and
we may suffer damage to our reputation, regardless of the merit or
eventual outcome of a claim. The ultimate judgments or settlements in any litigation or investigation
could have a material adverse effect on
our business, financial condition and results of operations. In addition,
premiums for insurance covering the financial and banking sectors
are
rising. We may not be able to obtain appropriate types or levels of insurance in the future, nor may
we be able to obtain adequate replacement
policies with acceptable terms or at historic rates, if at all.
We also participated in the Paycheck Protection Program, or PPP, a government
lending program implemented to aid individuals and
businesses in connection with the COVID-19 pandemic. As of December 31, 2022, approximately $500 million
have been forgiven by the
Small Business Administration, and we continued to hold PPP loans receivable of $3 million. We have credit risk on PPP loans if a
determination is made by the Small Business Administration that there is a deficiency in the manner in which a PPP loan was originated,
funded, or serviced by us, such as an issue with the eligibility of a borrower to receive
a PPP loan. Since the inception of the PPP, many
banks have been subject to litigation related to agent fees and application processing.
We and other banks may also be subject to the risk of
litigation in connection with other aspects of the PPP, including but not
limited to borrowers seeking forgiveness of their loans. As a result of
our ongoing and future participation in the PPP and similar government stimulus and relief programs, we may
experience losses arising from
fraud, litigation or regulatory action.
Financial counterparties expose the Company to risks.
We maintain correspondent bank relationships, manage certain loan
participations, engage in securities transactions and engage in
other activities with financial counterparties that are customary to our
industry. Many of these transactions expose us to counterparty credit,
liquidity and/or reputational risk in the event of default by the counterparty,
negative publicity and complaints about the counterparty or the
financial services industry in general. Although we seek to manage these risks through internal controls and procedures,
we may experience
loss or interruption of business, damage to our reputation, or incur additional
costs or liabilities as a result of unforeseen events with these
counterparties. Any financial cost, liability or reputational damage could have a material adverse effect on our
business, which in turn, could
have a material adverse effect on our financial condition and results of operations.
Severe weather, natural disasters, pandemics and other external events could
significantly impact our business.
Severe weather, including tornadoes, droughts and hailstorms, as well as wildfires
and other natural disasters, pandemics, acts of war
or terrorism and other adverse external events could have a significant impact on
our ability to conduct business. Such events could affect the
stability of our deposit base, impair the ability of borrowers to repay outstanding
loans, impair the value of collateral securing loans, cause
significant property damage, result in loss of revenue or cause us to incur additional
expenses. Operations in our markets could be disrupted
by both the evacuation of large portions of the population as well as damage or
lack of access to our banking and operation facilities. Military
and political conflicts, including the current military conflict between Russia and
Ukraine, may increase volatility in commodity and energy
prices, create supply chain issues and cause instability in financial markets, which
may adversely affect us and our clients. Other severe
weather or natural disasters, pandemics, acts of war or terrorism or other adverse
external events may occur in the future. Although
management has established business continuity plans and procedures, the
occurrence of any such events could have a material adverse effect
on our business, financial condition and results of operations.
The further spread of COVID-19 and its variants may adversely impact our
business, financial condition and results of
operations in the short-term and for the foreseeable future.
The COVID-19 pandemic caused significant disruption to economic
activity and financial markets and adversely impacted our
business, financial condition and results of operations. Given the ongoing
and dynamic nature of COVID-19 and its variants, the ultimate
effects on the broader economy and the markets in which we serve continue to be uncertain
and difficult to predict. Future impacts to our
business and clients could be widespread and material, such as increased unemployment,
continued supply-chain interruptions, declines in
demand for loans and other banking services and products, reduction
in business activity and financial transactions, increased commercial
property vacancy rates, declines in the value of loan collateral, including energy
and real-estate collateral, declines in the credit quality of our
loan portfolio, volatile performance of our investment securities portfolio,
and overall economic and financial market instability. In addition,
actions taken by governmental and regulatory authorities in response to the
pandemic have impacted, and may continue to impact, the
banking and financial services industries. Additional regulation may be enacted in the future that could further
impact our business.
Risks Relating to Our Regulatory Environment
We are subject to extensive regulation, which increases the cost and
expense of compliance and could limit or restrict our
activities, which in turn may adversely impact our earnings and ability
to grow.
We operate in a highly regulated environment and are subject to regulation,
supervision and examination by a number of governmental
regulatory agencies, including, with respect to the Bank, the FDIC and the
OSBCK and, with respect to the Company, the Federal Reserve.
Regulations adopted by these agencies govern a comprehensive range of
matters relating to ownership and control of our shares, our
acquisition of other companies and businesses, permissible activities for
us to engage in, maintenance of adequate capital levels, dividend
payments and other aspects of our operations. Bank regulators possess broad authority
to prevent or remedy unsafe or unsound practices or
violations of law. If, as a result of an examination, a banking agency determines
that an aspect of our operations is unsatisfactory, or that we
are, or our management is, in violation of any law or regulation, they may
take a number of different remedial actions as they deem
appropriate. These actions include the power to enjoin ‘‘unsafe or unsound’’ practices, to require affirmative action to correct any conditions
resulting from any violation or practice, to issue an administrative order that
can be judicially enforced, to direct an increase in our capital, to
restrict our growth, to assess civil money penalties against us or our officers or directors,
to fine or remove officers and directors and, if it is
concluded that such conditions cannot be corrected or there is an imminent
risk of loss to depositors, to terminate the Bank’s FDIC deposit
insurance and place the Bank into receivership or conservatorship. Any regulatory action against us could
have a material adverse effect on
our business, financial condition and results of operations.
Government policy, legislation and regulation, particularly monetary
policy from the Federal Reserve, significantly affect economic
growth and financial operations, including our distribution of credit, bank
loans, investments, deposits, product offerings and disclosures,
interest rates and bankruptcy proceedings for consumer residential real
estate mortgages. The laws and regulations applicable to the banking
industry could change at any time and we cannot predict the effects of these changes
on our business, profitability or growth strategy.
Increased regulation could increase our cost of compliance, adversely
affect profitability and inhibit our ability to conduct business consistent
with historical performance. If we do not comply with governmental regulations,
we may be subject to fines, penalties, lawsuits or material
restrictions on our businesses and growth that may damage our reputation
and adversely affect our business operations. Proposed legislative
and regulatory actions may not occur within expected time frames, or at all, which
creates additional uncertainty for our business and
industry.
Accordingly, legislative and regulatory actions taken now or in
the future could have a material adverse impact on our business,
financial condition and results of operation.
Many of our expansion and growth plans require regulatory approvals
and failure to obtain them may restrict our growth.
As part of our growth strategy, we may expand our business by pursuing
strategic acquisitions of financial institutions, adding
branches and pursuing acquisitions of other complementary businesses. Generally,
we must receive federal and state regulatory approval
before we can acquire an FDIC-insured depository institution or
related business. In determining whether to approve a proposed acquisition,
federal and state banking regulators will consider, among other factors,
the effect of the acquisition on competition, our financial condition,
our future prospects and the impact of the proposal on U.S. financial stability. The regulators also review
current and projected capital ratios,
the competence, experience and integrity of management and its record
of compliance with laws and regulations, the convenience and needs
of the communities to be served and the effectiveness of the acquiring institution
in combating money laundering activities.
The Federal Reserve may require the Company to commit capital resources
to support the Bank.
As a matter of policy, the Federal Reserve expects a bank holding company to act
as a source of financial and managerial strength to
its subsidiary banks.
The Federal Reserve may charge the bank holding company with engaging in unsafe
and unsound practices for failure to
adequately commit resources to a subsidiary bank. Accordingly, we may be required to make capital injections
into a troubled subsidiary
bank, even if such contribution creates a detriment to the Company or its stockholders.
If we do not have sufficient resources on hand to fund
the capital injection, we may be required to borrow funds or raise capital.
Any such loans are subordinate in right of payment to deposits and
to certain indebtedness of the subsidiary bank. In the event of bankruptcy of
the bank holding company, claims based upon any commitments
to fund capital injections are entitled to a priority of payment over claims made by
general unsecured creditors, including holders of
indebtedness. Thus, any borrowing incurred by the Company to make required capital
injections to the Bank could adversely impact our
financial condition, results of operations and future prospects. Additionally, under the Financial Institutions Reform
Recovery and
Enforcement Act of 1989 (“FIRREA”), losses caused by a failing bank subsidiary might be charged to the capital of an
affiliate bank.
Moreover, any bank operating under the Company’s common control
may also be required to contribute capital to a failing affiliate bank
within the Company’s control group. This is known as FIRREA’s “cross-guarantee”
provision. The Company currently has one bank
subsidiary.
The Company and the Bank are subject to stringent capital requirements
that may limit our operations and potential growth.
The Company and the Bank are subject to various regulatory capital requirements.
Failure to meet minimum capital requirements will
result in certain mandatory and discretionary actions by regulators that, if undertaken,
could have a direct material effect on our financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of our
assets, liabilities and certain off-balance sheet commitments as
calculated under these regulations. In order to be a “well-capitalized” depository
institution under prompt corrective action standards (but
without taking into account the capital conservation buffer requirement described
below), a bank must maintain a CET1 risk-based capital
ratio of 6.5% or more, a tier 1 risk-based capital ratio of 8.0% or more, a total risk-based
capital ratio of 10.0% or more and a leverage ratio
of 5.0% or more (and is not subject to any order or written directive specifying
any higher capital ratio). The failure to meet the established
capital requirements under the prompt corrective action framework could result
in one or more of our regulators placing limitations or
conditions on our activities, including our growth initiatives, or restricting
the commencement of new activities and such failure could
subject us to a variety of enforcement remedies available to the federal
regulatory authorities, including limiting our ability to pay dividends,
issuing a directive to increase our capital and terminating the Bank’s FDIC deposit
insurance, which is critical to the continued operation of
the Bank.
Including the capital conservation buffer requirement, the Company
and the Bank must effectively maintain a CET1 capital ratio of
7.0% or more, a tier 1 risk-based capital ratio of 8.5% or more, a total risk-based
capital ratio of 10.5% or more and, for the Bank, a leverage
ratio of 5.0% or more and for the Company, a leverage ratio of 4.0% or more.
Many factors affect the calculation of our risk-based assets and
our ability to maintain the level of capital required to achieve acceptable capital
ratios, such as increases to our risk-weighted assets, loan
impairments, loan losses exceeding the amount reserved for such losses and
other factors that decrease our capital, thereby reducing
the level
of the applicable ratios. Our failure to remain well-capitalized could affect client
and investor confidence, our ability to grow, our costs of
funds, the interest rates that we pay on deposits, FDIC insurance costs, our
ability to pay dividends on common stock, our ability to make
acquisitions and our business, results of operations and financial condition.
Higher FDIC deposit insurance premiums and assessments could adversely
affect our financial condition.
Our deposits are insured up to applicable limits by the DIF and are subject
to deposit insurance assessments to maintain deposit
insurance. As an FDIC-insured institution, we are required to pay quarterly deposit insurance premium assessments to the
FDIC. Growth in
insured deposits at FDIC-insured financial institutions in recent years caused
the ratio of the DIF to total insured deposits to fall below the
current statutory minimum, and the FDIC has approved an increase in the base
assessment rates to increase the likelihood that the reserve
ratio of the DIF reaches the statutory minimum level by the statutory deadline. Although we cannot predict what
the insurance assessment
rates will be in the future, either a deterioration in our risk-based capital ratios or
further adjustments to the base assessment rates could have
a material adverse impact on our business, financial condition, results of operations
and cash flows.
We face a risk of noncompliance and enforcement action with respect
to the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
The BSA, the PATRIOT Act and other laws and regulations require financial institutions, among other duties, to institute and
maintain
an effective anti-money laundering program and to file reports such as suspicious
activity reports and currency transaction reports. Violation
of such requirements may result in significant civil money penalties imposed
by federal banking agencies and the U.S. Department of the
Treasury's Financial Crimes Enforcement Network, which agencies
have recently engaged in coordinated enforcement efforts against banks
and other financial services providers with the U.S. Department of Justice (“DOJ”), the
Drug Enforcement Administration and the IRS. We
are also subject to increased scrutiny of compliance with the rules enforced
by the OFAC, which may require sanctions for dealing with
certain persons or countries. If the policies, procedures and systems of our
company, or any of our subsidiaries, are deemed deficient, we
would be subject to fines and regulatory actions, which may include restrictions
on our ability to pay dividends and requirements to obtain
regulatory approvals to proceed with certain aspects of our business plan, including
our acquisition plans. Failure to maintain and implement
adequate programs to combat money laundering and terrorist financing
could also have serious reputational consequences for us. Any of
these results could have a material adverse effect on our business, financial condition,
results of operations and growth prospects.
Regulations relating to privacy, information security and data protection
could increase our costs, affect or limit how we
collect and use personal information and adversely affect our business
opportunities.
We are subject to various privacy, information security and data protection laws, including
requirements concerning security breach
notification and we could be negatively impacted by these laws. For example,
our business is subject to the Gramm-Leach-Bliley Act which,
among other things: (i) imposes certain limitations on our ability to share non-public
personal information about our clients with non-
affiliated third parties; (ii) requires that we provide certain disclosures to clients about
our information collection, sharing and security
practices and afford clients the right to “opt out” of any information sharing by us with
non-affiliated third parties (with certain exceptions);
and (iii) requires that we develop, implement and maintain a written comprehensive
information security program containing safeguards that
are appropriate based on our size and complexity, the nature and scope of
our activities and the sensitivity of client information we process,
as well as plans for responding to data security breaches. Many state and
federal banking regulators, states and foreign countries have also
enacted data security breach notification requirements with varying levels
of individual, consumer, regulatory or law enforcement
notification in certain circumstances in the event of a security breach. Moreover,
legislators and regulators in the United States and other
countries are increasingly adopting or revising privacy, information security
and data protection laws that potentially could have a significant
impact on our current and planned privacy, data protection and information
security-related practices, our collection, use, sharing, retention
and safeguarding of client or employee information and some of our current
or planned business activities. This could also increase our costs
of compliance and business operations and could reduce income from certain
business initiatives. This includes increased privacy-related
enforcement activity at the federal level by the Federal Trade Commission, as well as at the state level.
Compliance with current or future privacy, data protection and information
security laws (including those regarding security breach
notification) affecting client or employee data to which we are subject could result
in higher compliance and technology costs and could
restrict our ability to provide certain products and services, which could have
a material adverse effect on our business, financial conditions
or results of operations. Our failure to comply with privacy, data protection and
information security laws could result in potentially
significant regulatory or governmental investigations or actions, litigation,
fines, sanctions and damage to our reputation, which could have a
material adverse effect on our business, financial condition or results of operations.
We face increased risk under the terms of the CRA
as we accept additional deposits in new geographic markets.
Under the terms of the CRA, each appropriate federal bank regulatory
agency is required, in connection with its examination of a
bank, to assess such bank’s record in assessing and meeting the credit needs of
the communities served by that bank, including low- and
moderate-income neighborhoods. During these examinations, the regulatory
agency rates such bank’s compliance with the CRA as
“Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.”
The Bank had a CRA rating of “Satisfactory” as of its
most recent CRA assessment. The regulatory agency’s assessment of an institution’s record is part of the regulatory agency’s consideration
of
applications to acquire, merge or consolidate with another banking
institution or its holding company, or to open or relocate a branch office.
As we accept additional deposits in new geographic markets, we will be required
to maintain an acceptable CRA rating, which may be
difficult.
We are subject to numerous laws designed to protect consumers, including
the CRA and fair lending laws and
failure to
comply with these laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose
nondiscriminatory lending requirements on financial institutions. The U.S. Department
of Justice and other federal agencies are responsible
for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the CRA or fair lending
laws and regulations could result in a wide variety of sanctions, including damages
and civil money penalties, injunctive relief, restrictions
on mergers and acquisitions activity, restrictions on expansion and restrictions
on entering new business lines. Private parties also could
challenge an institution’s performance under fair lending laws in private class action
litigation. Such actions could have a material adverse
effect on our business, financial condition, results of operations and
future prospects.
Risks Related to Our Common Stock
The price of our common stock could be volatile.
The market price of our common stock may be volatile and could
be subject to wide price fluctuations in response to various
factors, some of which are beyond our control. These factors include, among other
things, actual or anticipated variations in our quarterly or
annual results of operations; recommendations by securities analysts; operating
performance or fluctuations in the stock price performance of
other companies that investors deem comparable to us; news reports relating
to trends, concerns and other issues in the financial services
industry generally; conditions in the banking industry such as credit quality
and monetary policies; domestic and international economic
factors unrelated to our performance; perceptions, general market conditions
and, in particular, developments related to market conditions for
the financial services industry; loss of investor confidence in the market
for stocks; new technology used, or services offered, by competitors;
loss of investor confidence and changes in government regulations. If any of the foregoing
occurs, it could cause our stock price to fall and
may expose us to lawsuits that, even if unsuccessful, could be costly to defend
and be a distraction to management.
Kansas law and the provisions of our articles of incorporation and bylaws
may have an anti-takeover effect and there are
substantial regulatory limitations on changes of control of bank holding
companies.
Kansas corporate law and provisions of our articles of incorporation and our bylaws
could make it more difficult for a third party to
acquire us, even if doing so would be perceived to be beneficial by our stockholders.
Furthermore, with certain limited exceptions, federal
regulations prohibit a person or company or a group of persons deemed to be
“acting in concert” from, directly or indirectly, acquiring more
than 10% (5% if the acquirer is a bank holding company) of any class of our voting
stock or obtaining the ability to control in any manner the
election of a majority of our directors or otherwise direct the management or
policies of our Company without prior notice or application to
and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with
these requirements, if
applicable, in connection with any purchase of shares of our common stock.
Collectively, provisions of our articles of incorporation and
bylaws and other statutory and regulatory provisions may delay, prevent or
deter a merger, acquisition, tender offer, proxy contest or other
transaction that might otherwise result in our stockholders receiving
a premium over the market price for their common stock. Moreover, the
combination of these provisions effectively inhibits certain business combinations,
which, in turn, could adversely affect the market price of
our common stock.
Future equity issuances could result in dilution, which could cause
the price of our shares of common stock to decline.
We are generally not restricted from issuing additional shares of stock, up
to the 200,000,000 shares of voting common stock and
5,000,000
shares of preferred stock authorized in our articles of incorporation. We may issue additional
shares of our common stock in the
future in various transactions, including pursuant to current or future
equity compensation plans, upon conversions of preferred stock or debt,
upon exercise of warrants or in connection with future acquisitions or financings.
If we choose to issue additional shares of our common
stock, or securities convertible into shares of our common stock, for any reason,
the issuance would have a dilutive effect on the holders of
our common stock and could have a material negative effect on the market
price of our common stock.
We may issue shares of preferred stock in the future, which could
make it difficult for another company to acquire us or
could otherwise adversely affect holders of our common stock.
Our articles of incorporation authorize us to issue up to 5,000,000 shares
of one or more series of preferred stock. Our Board of
Directors has the power to set the terms of any series of preferred stock
that may be issued, including voting rights, dividend rights,
conversion rights, preferences over our voting common stock with respect
to dividends or in the event of a dissolution, liquidation or winding
up and other terms. If we issue preferred stock in the future that has preference over
our common stock with respect to payment of dividends
or upon our liquidation, dissolution or winding up, the rights of the holders
of our common stock or the market price of our common stock
could be adversely affected.
Our dividend policy may change without notice,
and our future ability to pay dividends is subject to restrictions.
Holders of our common stock are entitled to receive only such dividends as our
Board of Directors may declare out of funds legally
available for such payments. The Federal Reserve has indicated that bank holding
companies should carefully review their dividend policy in
relation to the organization’s
overall asset quality, current and
prospective earnings and capital level, composition and quality.
Furthermore,
the Federal Reserve may prohibit payment of dividends that are deemed
unsafe or unsound practice.
Accordingly, any declaration and
payment of dividends on our common stock will depend upon many factors,
including our earnings and financial condition, liquidity and
capital requirements, the general economic and regulatory climate, our
ability to service any equity or debt obligations senior to our common
stock, our capital management policies and strategic plans; our growth
initiatives; and other factors deemed relevant by our Board of
Directors.
Any such factor could adversely affect the amount of dividends, if any, paid to our
common stockholders. If declared, dividends
will be payable to the holders of shares of our common stock on a pro rata basis in accordance
with their shares held. If preferred shares are
issued, such shares may be entitled to priority over the common shares as to dividends.
Other than the stock dividend provided to our
stockholders pursuant to our two-for-one stock split in 2018, we have no history
of paying dividends to holders of our common stock.
We are a bank holding company and our only source of cash, other
than further issuances of securities, is distributions from
our wholly owned subsidiaries.
We are a bank holding company with no material activities other than activities incidental
to holding the common stock of the Bank.
Our principal source of funds to pay distributions on our common
stock and service any of our obligations, other than further issuances of
securities, would be dividends received from our wholly owned subsidiaries.
Furthermore, our wholly owned subsidiaries are not obligated to
pay dividends to us and any dividends paid to us would depend on the earnings
or financial condition of our wholly owned subsidiaries and
various business considerations. As is the case with all financial institutions, the profitability of our wholly owned
subsidiaries is subject to
the fluctuating cost and availability of money, changes in interest rates and economic
conditions in general. In addition, various federal and
state statutes limit the amount of dividends that our wholly owned subsidiaries
may pay to the Company without regulatory approval.
As an emerging growth company, or EGC, we utilize certain exemptions
from disclosure requirements which could make our
shares less attractive to investors and make it more difficult to compare
our performance with other public companies.
As an “emerging growth company”, we may take advantage of certain exemptions from
various reporting requirements including, but
not limited to, not being required to comply with the auditor attestation requirements
of Section 404 of the Sarbanes-Oxley Act of 2002 and
reduced disclosure obligations regarding executive compensation.
In addition, as an emerging growth company we are not required to
comply with new or revised financial accounting standards until private
companies are required to comply and we have not opted out of this
extended transition period. When a standard is issued or revised and it has different application dates
for public or private companies, we can
adopt the new or revised standard at the time private companies adopt the
new or revised standard. This may make comparison of our
financial statements with another public company which is neither an emerging
growth company nor an emerging growth company which
has opted out of the extended transition period difficult or impossible because of
the potential differences in accounting standards used. If
some investors find our shares less attractive as a result of our reliance on
these exemptions, the trading prices of our shares may be lower
than they otherwise would be.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B.
UNRESOLVED
STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2.
PROPERTIES
Our headquarters is located at 11440 Tomahawk Creek Parkway, Leawood, Kansas.
Including our headquarters building, we operate
12 full-service banking centers located in: Leawood, Kansas; Wichita, Kansas; Kansas City,
Missouri; Oklahoma City, Oklahoma; Tulsa,
Oklahoma; Dallas, Texas; Frisco, Texas; Phoenix, Arizona; Denver, Colorado; Colorado Springs, Colorado; and Clayton, New Mexico. We
own our headquarters building, our banking centers in Leawood, Kansas, Wichita, Kansas, Oklahoma
City, Oklahoma and Clayton, New
Mexico and we lease the remainder of our locations. In addition, the
Company signed a second lease agreement in Dallas, Texas and a new
lease in Fort Worth, Texas.
We anticipate these additional locations will be open to our clients in 202
3. We believe that the leases to which we
are subject are generally on terms consistent with prevailing market terms. We also believe that
our facilities are in good condition and are
adequate to meet our operating needs for the foreseeable future.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3.
LEGAL PROCEEDINGS
In the normal course of business, we are named or threatened to be named
as defendant in various lawsuits. Management, following
consultation with legal counsel, does not expect the ultimate disposition of
any one matter or a combination of these matters to have a
material adverse effect on our business, financial condition, results of operations,
cash flows or growth prospects. However, given the nature,
scope and complexity of the extensive legal and regulatory landscape applicable
to our business (including laws and regulations governing
consumer protection, fair lending, fair labor, privacy, information security and
anti-money laundering and anti-terrorism laws), we, like all
banking organizations, are subject to heightened legal and regulatory
compliance
and litigation risk.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT
OUR EXECUTIVE OFFICERS
The following table sets forth certain information regarding our executive
officers and the executive officers of the Bank, including
their names, ages and positions:
Name
Age as of March 3, 2023
Position(s)
Michael J. Maddox
President and Chief Executive Officer of the Company and
Chief Executive Officer of the Bank
W. Randall Rapp
President of the Bank
Benjamin R. Clouse
Chief Financial Officer of the Company and the Bank
Amy Fauss
Chief Human Resources Officer of the Company and the Bank
Steve Peterson
Chief Banking Officer of the Company and the Bank
Jana Merfen
Chief Technology Officer of the Company and the Bank
Amy Abrams
General Counsel and Corporate Secretary of the Company and
the Bank
Michael J. Maddox
-Mr. Maddox has served as President and Chief Executive Officer of the Company
since June 1, 2020, and as
Chief Executive Officer of the Bank since November 28, 2008. He
also served as President of the Bank from November 2008 until June
2022, when the roles of Chief Executive Officer and President of
the Bank were split. Prior to joining the Bank, he was a Regional President
for Intrust Bank. In this role, he managed Intrust Bank’s operations in Northeast
Kansas. Mr. Maddox has over 20 years of banking
experience. Mr. Maddox attended the University of Kansas from which he
received a Business degree and a law degree. While at KU, Mr.
Maddox was a four-year basketball letterman and a member of the
KU team that won the National Championship in 1988. Mr. Maddox
completed the Graduate School of Banking at the University of Wisconsin - Madison
in 2003. Mr. Maddox is a member of the Economic
Development Board of Johnson County and serves on the Kansas City Civic Council.
He has served on the board of CrossFirst Bank since
2008 and currently serves as Chairman of the Board of CrossFirst Bank.
W. Randall Rapp
-Mr. Rapp was appointed President of the Bank effective July 1, 2022. He
served as the Chief Risk and Credit
Officer for the Bank from April 2021 until July 2022, and Chief Credit Officer
of the Bank from April 2019 until April 2021. Prior to joining
the Bank, Mr. Rapp held various positions at Texas Capital Bank, N.A. from March 2000 until
March 2019, including serving as Executive
Vice President and Chief Credit Officer from May 2015 until March 2019,
and as a Senior Credit Officer from 2013 until May 2015. He has
more than three decades of commercial banking experience, most of which
has been spent in credit management for private and public banks
in the Dallas/Fort Worth
metroplex. He earned a BBA in Accounting from The University of Texas
at Austin and an MBA in Finance from
Texas Christian University.
He is also a licensed CPA.
Mr. Rapp is a member
of the CrossFirst Bank Board of Directors.
Benjamin R. Clouse
-Mr. Clouse has served
as Chief Financial Officer of the Company since July 2021, leading the financial
organization and overall long-range financial planning
and reporting of the Company and the Bank, as well as supporting the execution of
the Bank's growth strategy.
He also serves as Chief Financial Officer and Cashier of the Bank. Prior to
joining CrossFirst, Mr. Clouse served
as Chief Financial Officer of Waddell
& Reed Financial, Inc., a financial services firm, from 2018 until its acquisition
in 2021. Mr. Clouse
held a variety of other senior leadership roles at Waddell
& Reed between March 2016 and February 2018, including Vice
President and
Chief Accounting Officer,
Vice President and Principal Accounting
Officer and Vice
President.
Prior to joining Waddell & Reed,
Mr.
Clouse served as Chief Financial Officer of Executive
AirShare Corporation, a private aviation company,
from September 2012 to October
2015. From 2006 to 2012 and from 2002 to 2005, he served in various
roles with H&R Block, Inc., a tax preparation company in Kansas
City, Missouri, including
Assistant Vice President-Audit Services
and Assistant Vice President and
Controller-Tax Services. From
to 2006, Mr. Clouse served as Vice
President-Finance and Corporate Controller of Gold Bank Corporation,
Inc., a bank holding company.
From September 1996 to January 2002, he served in various roles in the audit practice
of Deloitte. Mr. Clouse obtained a business
degree and
a Master of Accountancy degree from Kansas State University.
Amy Fauss
-Ms. Fauss has served as Chief Human Resources Officer of
the Company and the Bank since January 2021 and
previously served as the Chief Operating Officer of the Bank from December
2009 until June 2022. Prior to joining CrossFirst, she served as
Executive Vice President
and Chief Operating Officer of Solutions Bank, where she directed all aspects of
daily operations and human
resources. Her experience also includes senior management positions
at Hillcrest Bank and Citizens-Jackson County Bank. Ms. Fauss holds a
Bachelor of Science degree in Finance from Central Missouri State University and
an MBA from University of Missouri - Kansas City.
She
has also completed the Graduate School of Banking at the University of
Wisconsin - Madison.
Steve Peterson-
Mr. Peterson has served as Chief Banking Officer since July 2020.
Prior to this role, Mr. Peterson served as the
Wichita Bank President for CrossFirst Bank from August 2011 until his appointment to Chief Banking Officer. Prior
to joining CrossFirst
Bank, Mr. Peterson served as Division President of Stillwater National Bank
from 2004 to August 2011, where he expanded the bank into
new two new major markets in Texas. From 2002 to 2004, Mr. Peterson was the City President at Compass Bank.
He served in roles of both
Vice President of Commercial Banking as well as Community Bank President for Commerce
Bank from 1998-2002. He spent several years
as an entrepreneur, owning and operating several restaurant franchise units
from 1991-1998.
From 1987 to 1991, he severed in several roles
at Bank IV, including Commercial Business Development. Mr. Peterson
received his Bachelor of Science degree in Business Administration
from the University of Kansas.
Jana Merfen
-Ms. Merfen joined CrossFirst in January 2021
as Chief Technology Officer. Prior to that she served as Chief
Information Officer of Dickinson Financial Corp. and Academy Bank from April 2017 to January 2021. Prior to working at Dickinson
Financial Corp. and Academy Bank, she worked at CommunityAmerica Credit Union where she was the Director
of Information Systems &
Enterprise Project Manager Officer from July 2016 to April 2017 and was the Director of Enterprise Risk Management
and Business Process
Operations from September 2014 to July 2016. Ms. Merfen has a degree
in accounting from Miami University in Ohio.
Amy Abrams
- Ms. Abrams was appointed General Counsel and Corporate Secretary of the Company and the Bank in June 2022.
As
General Counsel and Corporate Secretary, Ms. Abrams is responsible for the oversight of CrossFirst’s legal affairs and
corporate governance
matters.
Prior to joining the Company and the Bank, Ms. Abrams provided legal assistance to Cerner Corporation and its global affiliates
(“Cerner”) from October 2011 until May 2022, most recently serving
as Lead Counsel - SEC & Corporate and Assistant Secretary. Cerner
(recently acquired by Oracle Corporation) was a supplier of healthcare
information technology services, devices, and hardware. Prior to
Cerner, Ms. Abrams was an attorney at the law firm of Polsinelli P.C. Ms. Abrams earned her Juris Doctorate
degree from Loyola University-
Chicago School of Law and has a business degree from the University of
Kansas.
Part II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
Our common stock is traded on the Nasdaq Global Select Market under the
symbol “CFB.” We had 374 holders of record at
February 23, 2023.
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
$140.00
$160.00
$180.00
Total Return Performance
CrossFirst Bankshares, Inc.
Russell 2000 Index
KBW Nasdaq Regional Banking Index
Performance Graph
The following table and graph sets forth the cumulative total stockholder return for
the Company’s common stock from August 15,
2019 (the date that our common stock commenced trading on the Nasdaq
Global Select Market) through December 30, 2022 (the last trading
day of the year), compared to an overall stock market index (Russell 2000 Index)
and one peer group index (KBW Nasdaq Regional Banking
Index) for the same period. The indices are based on total returns assuming reinvestment
of dividends. The graph assumes an investment of
$100 on August 15, 2019. The performance graph represents past performance
and should not be considered to be an indication of future
performance.
The performance graph and related text are being furnished to and not filed
with the SEC, and will not be deemed “soliciting
material” or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be
deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent we specifically
incorporate such information by reference into such a filing.
8/15/2019
12/31/2019
12/31/2020
12/31/2021
12/30/2022
CrossFirst Bankshares, Inc.
$
100.00
$
99.45
$
73.63
$
106.92
$
85.00
Russell 2000 Index
$
100.00
$
114.85
$
137.77
$
158.19
$
125.86
KBW Nasdaq Regional Banking Index
$
100.00
$
116.94
$
102.79
$
136.92
$
123.98
Dividends
Historically, CrossFirst has not declared or paid any dividends on its common
stock. Payments of future dividends, if any, will be at
the discretion of our Board of Directors and will depend upon our results of operations,
our financial condition, capital requirements, general
economic conditions, regulatory and contractual restrictions, our
business strategy, our ability to service any equity or debt obligations
senior
to our common stock and other factors that our Board of Directors deems relevant. We are not obligated
to pay dividends on our common
stock and are subject to restrictions on paying dividends on our common stock.
Our principal source of funds to pay dividends on our common stock would
be dividends received from our wholly-owned
subsidiaries. Furthermore, our wholly-owned subsidiaries are not obligated
to pay dividends to us, and any dividends paid to us would
depend on the earnings or financial condition of our wholly-owned
subsidiaries and various business considerations. As is the case with all
financial institutions, the profitability of our wholly-owned subsidiaries
is subject to the fluctuating cost and availability of money, changes
in interest
rates and economic conditions in general. In addition, various federal
and state statutes limit the amount of dividends that our
wholly-owned subsidiaries may pay to the Company without regulatory approval.
Share Repurchase Program
The following table summarizes our repurchases of our common shares
for the three months ended December 31, 2022:
Calendar
Month
Total Number of
Shares
Repurchased
Average Price
Paid per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
Approximate Dollar Value of Shares
that may yet be Purchased as Part
of Publicly Announced Plans or
Programs
October 1 - 31
177,712
$
13.46
177,712
$
18,280,265
November 1 - 30
39,824
$
13.72
39,824
$
17,733,858
December 1 - 31
140,110
$
13.28
140,110
$
15,872,867
Total
357,646
$
13.42
357,646
On October 18, 2021, the Company announced that its Board of Directors approved
a share repurchase program under which the
Company may repurchase up to $30 million of its common stock. This program was completed
during the third quarter of 2022.
On May 10,
2022, the Company announced that its Board of Directors approved
a second share repurchase program under which the Company may
repurchase up to $30 million of its common stock. As of December 31, 2022, approximately $16 million remains
available for repurchase
under this share repurchase program. Repurchases under the program
may be made in open market or privately negotiated transactions in
compliance with SEC Rule 10b-18, subject to market conditions, applicable
legal requirements and other relevant factors. The program does
not obligate the Company to acquire any amount of common stock, and
it may be suspended at any time at the Company's discretion. No
time limit has been set for completion of the program.
See Part III, Item 12 for information relating to securities authorized for
issuance under our equity compensation plans.

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6.
[RESERVED]

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7.
MANAGEMENT’S DISCUSSION
AND ANALYSIS
OF FINANCIAL
CONDITION AND
RESULTS OF OPERATIONS
Overview
This section includes a discussion of the financial condition and results of operations
of CrossFirst Bankshares, Inc. and its
subsidiaries. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations
in our 2021 Form 10-K filed
with the SEC on February 28, 2022 for a discussion of the financial condition and results
of operations of the Company for the period ended
December 31, 2020 and a comparison between the 2021 and 2020 results.
Tables may include additional periods to comply with disclosure
requirements or to illustrate trends in greater depth. You should read
the following financial data in conjunction with the other information contained
in this 10-K, including under “Part I, Item 1A. Risk Factors,”
and in the financial statements and related notes included elsewhere
in this 10-K.
Growth History
We have grown organically primarily by establishing our branch
light network in seven states, attracting new clients and expanding
our relationships with existing clients, as well as through three strategic acquisitions. The
data below presents the business' growth in key
areas for the past five years and the related compound annual growth rate (“CAGR”):
2018 to 2022
As of December 31,
CAGR
(Dollars in thousands)
Available-for-sale ("AFS") securities
%
$
686,901
$
745,969
$
654,588
$
739,473
$
661,628
Gross loans (net of unearned income)
(1)
5,372,729
4,256,213
4,441,897
3,852,244
3,060,747
Total assets
6,601,086
5,621,457
5,659,303
4,931,233
4,107,214
Non-interest-bearing deposits
1,400,260
1,163,224
718,459
521,826
484,284
Total deposits
%
$
5,651,308
$
4,683,597
$
4,694,740
$
3,923,759
$
3,208,097
(1)
Includes $3 million, $65 million and $292 million of PPP loans at December 31, 2022, 2021 and 2020, respectively.
Performance Measures
As of or for the Year Ended December 31,
(Dollars in thousands, except per share data)
Return on average assets
1.07
%
1.24
%
0.24
%
Adjusted return on average assets
(1)
1.19
%
1.31
%
0.37
%
Return on average common equity
9.97
%
10.84
%
2.05
%
Adjusted return on average common equity
(1)
11.11
%
11.40
%
3.26
%
Earnings per share
$
1.24
$
1.35
$
0.24
Diluted earnings per share
$
1.23
$
1.33
$
0.24
Adjusted diluted earnings per share
(1)
$
1.37
$
1.40
$
0.38
Efficiency ratio
(2)
57.75
%
54.50
%
58.13
%
Adjusted efficiency ratio - FTE
(1)(2)(3)
54.43
%
52.02
%
52.98
%
Ratio of equity to assets
9.22
%
11.88
%
11.03
%
(1)
Represents a non-GAAP financial measure.
See "Non-GAAP Financial Measures" in Management Discussion and Analysis for a reconciliation of
these measures.
(2)
We calculate efficiency ratio as non-interest expense divided by the sum of net interest income and non-interest income.
(3)
Tax exempt income (tax-free municipal securities) is calculated on a tax equivalent basis.
The incremental tax rate used is 21.0%.
2022 Highlights:
●
Completed the acquisition of Farmers & Stockmens Bank (“Central”) adding
liquidity, new production talent, and expanding
into attractive and growing markets
o
Added $389 million of loans and $570 million of deposits
●
Total assets were $6.6 billion primarily made up of $5.4 billion in loans and
$687 million in securities
●
Loans grew $1.1 billion for the year or 26%; excluding the Central acquisition,
loans grew 17% for the year
●
Deposits grew $968 million for the year or 21%; excluding the Central acquisition,
deposits grew 9% for the year
●
Credit quality improved meaningfully with the non-performing assets to total
assets ratio at 0.20% at year end and full year net
charge offs of just 0.08%
●
Purchased 2,448,428 or $36 million of outstanding shares as part of
the share repurchase programs in 2022 representing 5% of
outstanding shares
●
Launched a new digital banking platform, providing enhanced online
tools and resources for clients
●
Book value per share decreased to $12.56 compared to $13.23 in the prior year. Tangible
book value per share
(1)
decreased to
$11.96 compared to $13.23 in the prior year as earnings were more than offset
by an increase in the unrealized losses on our
investment portfolio, the impact of Central and a reduction due to share repurchases
(1)
Represents a non-GAAP financial measure.
See “Non-GAAP Financial Measures” in Management Discussion and Analysis for a
reconciliation of these measures.
Update to Net Interest Margin Methodology
The Company modified the yield calculation on the AFS security portfolio to better conform to peer disclosures in the
first quarter
of 2022. All earning-asset yields and net interest margins presented were retroactively updated for the change in methodology. The
following
changes were made:
●
The average unrealized gain (loss) on AFS securities balance was removed from the security lines and placed in other non-
interest earning assets
●
The annualization method was changed from Actual/Actual to 30/360 for the security yields
The Company believes the new calculation provides better insight into
why the security yields and net interest margin changed
period-to-period.
For the Year Ended December 31,
Previous calculation
Yield on securities - taxable
1.93
%
2.26
%
Yield on securities - tax-exempt
(1)
3.28
3.52
Yield on interest-earning assets
(1)
3.60
3.96
Net interest spread
(1)
3.10
3.04
Net interest margin
(1)
3.15
3.13
As calculated going forward
Yield on securities - taxable
1.96
2.32
Yield on securities - tax-exempt
(1)
3.48
3.74
Yield on interest-earning assets
(1)
3.62
3.98
Net interest spread
(1)
3.12
3.06
Net interest margin
(1)
3.17
3.15
Change
Yield on securities - taxable
0.03
0.06
Yield on securities - tax-exempt
(1)
0.20
0.22
Yield on interest-earning assets
(1)
0.02
0.02
Net interest spread
(1)
0.02
0.02
Net interest margin
(1)
0.02
%
0.02
%
(1)
Tax-exempt income is calculated on a tax-equivalent basis. Tax-free municipal securities
are exempt from Federal taxes. The incremental
tax rate used is 21%.
Concentrations
As of December 31, 2022, the Company’s top 25 largest borrowing relationships
totaled approximately $1.9 billion in total
commitments,
representing, in the aggregate, 24% of our total outstanding commitments. As of December 31, 2022, the Company’s top
deposit relationships
represented approximately 25%, or $1.4 billion, of total deposits. The majority
of the $1.4 billion are money market
deposit accounts. The Company believes that there are sufficient funding sources, including
on-balance sheet liquid assets and wholesale
deposit options, so that an immediate reduction in these deposit balances would
not be expected to have a detrimental effect on the
Company’s financial position or operations.
For the year ended December 31, 2021, a significant portion of the
Company’s ATM and credit card interchange income was driven by
companies that mobilized their workforce directly impacted by the
COVID-19 pandemic. These companies represented $5 million or 61% of
the $8 million in ATM and credit card interchange income. This activity did not re-occur in 2022 at the same level.
Discussion and Analysis - Results
of Operations
Net Interest Income
Our profitability depends in substantial part on our net interest income.
Net interest income is the difference between the amounts
received on our interest-earning assets and the interest paid on our interest-bearing
liabilities. Net interest income is impacted by internal and
external factors including:
•
Changes in the volume, rate, and mix of interest-earning assets and interest-bearing
liabilities;
•
Changes in competition, federal economic, monetary and fiscal policies and
economic conditions; and
•
Changes in credit quality.
We present and discuss net interest income on a fully tax-equivalent basis (“FTE”).
For the fiscal year ended December 31, 2022, we operated in an increasing
interest rate environment.
Our earning assets repriced
quicker than our cost of funds, resulting in a higher net interest margin in 2022.
During 2022, the Company benefited from changes in our
deposit mix, including an increase in non-interest-bearing deposits that helped
manage cost of funds.
The following table presents, for the periods indicated, average statement
of financial condition information, interest income, interest
expense and the corresponding average yield earned and rates paid:
For the Years
Ended December 31,
Average
Balance
Interest
Income /
Expense
Yield / Rate
(4)
Average
Balance
Interest
Income /
Expense
Yield / Rate
(4)
Average
Balance
Interest
Income /
Expense
Yield / Rate
(4)
(Dollars in thousands)
Interest-earning assets:
Securities - taxable
$
220,760
$
5,286
2.39
%
$
201,419
$
3,955
1.96
%
$
261,059
$
6,058
2.32
%
Securities - tax-exempt - FTE
(1)
551,734
18,559
3.36
488,544
16,981
3.48
421,548
15,745
3.74
Federal funds sold
3,139
1.56
-
-
-
1,020
1.73
Interest-bearing deposits in other banks
239,240
3,702
1.55
389,893
0.13
179,978
0.35
Gross loans, net of unearned income
(2)(3)
4,603,697
224,138
4.87
4,340,791
174,660
4.02
4,310,345
183,738
4.26
Total interest-earning assets
- FTE
(1)
5,618,570
$
251,734
4.48
%
5,420,647
$
196,098
3.62
%
5,173,950
$
206,180
3.98
%
Allowance for loan losses
(57,388)
(73,544)
(68,897)
Other non-interest-earning assets
198,849
244,368
253,426
Total assets
$
5,760,031
$
5,591,471
$
5,358,479
Interest-bearing liabilities
Transaction deposits
$
538,604
$
4,951
0.92
%
$
608,063
$
1,152
0.19
%
$
447,777
$
1,696
0.38
%
Savings and money market deposits
2,475,891
33,599
1.36
2,338,315
8,225
0.35
1,993,964
14,033
0.70
Time deposits
688,095
11,432
1.66
812,774
9,146
1.13
1,155,492
20,856
1.80
Total interest-bearing deposits
3,702,590
49,982
1.35
3,759,152
18,523
0.49
3,597,233
36,585
1.02
FHLB and short-term borrowings
232,018
4,855
2.09
279,379
5,840
2.09
417,956
6,508
1.56
Trust preferred securities, net of fair value
adjustments
1,072
13.25
9.76
11.34
Non-interest-bearing deposits
1,146,594
-
-
876,309
-
-
684,294
-
-
Cost of funds
5,082,274
$
54,979
1.08
%
4,915,822
$
24,459
0.50
%
4,700,422
$
43,199
0.92
%
Other liabilities
60,175
35,447
43,331
Stockholders’ equity
617,582
640,202
614,726
Total liabilities and stockholders’
equity
$
5,760,031
$
5,591,471
$
5,358,479
Net interest income - FTE
(1)
$
196,755
$
171,639
$
162,981
Net interest spread - FTE
(1)
3.40
%
3.12
%
3.06
%
Net interest margin -FTE
(1)
3.50
%
3.17
%
3.15
%
(1)
Calculated on a fully tax-equivalent basis. Tax
-free municipal securities are exempt from Federal taxes. The incremental
tax rate used is 21%.
(2)
Loans, net of unearned income includes non-accrual loans of $11
million, $31 million and $75 million as of December 31,
2022, 2021 and 2020, respectively.
(3)
Loan interest income includes loan fees of $14 million, $18 million
and $14 million for the years ended December 31, 2022,
2021 and 2020, respectively.
(4)
Actual unrounded values are used to calculate the reported yield or rate
disclosed. Accordingly, recalculations
using the amounts in thousands as disclosed in this report may
not produce the same
amounts.
Interest Income -
Interest income increased for the year ended December 31, 2022 compared to the same period
in 2021. The yield on
earning assets increased 86 basis points, led by an 85 basis point increase in
loan yields driven by the repricing of existing loans, origination
of new loans and the Central acquisition. The yield on the investment portfolio also increased
five basis points.
Average earning assets
increased
$197.9 million due to $262.9 million higher average loans and an $82.5 million increase in
the average investment portfolio. The
increased loan balances were due to strong loan growth, both organically
and due to the acquisition of Central.
Interest Expense -
Interest expense increased for the year ended December 31, 2022, compared
to the same period in 2021. The cost of
interest-bearing deposits increased due to the higher interest rate environment
and increased competition for deposits. The average volume
for interest-bearing deposits declined primarily because of decreases in time
deposits
and transaction deposits, partially offset by increases in
savings and money market deposits. Average FHLB and other borrowings declined compared to 2021; however,
the rate paid on these
borrowings remained consistent year over year.
The cost of funds increase was partially offset by an increase in average non-interest-bearing
deposits from 2021 to 2022. We currently anticipate our cost of funds will increase in 2023
due to continued increases in the interest rate
environment and competition for deposits.
36%
38%
9%
1%
(1%)
17%
34%
59%
25%
7%
(46%)
21%
Service charges & fees
ATM & credit card
Bank-owned life
insurance ("BOLI")
AFS gain on sale
Gains (losses) on
equity securities
Other
Breakout of Non-interest Income
Net Interest Income -
Full year 2022 net interest income grew $24.8 million, an increase of 15% compared
to 2021.
Full year net interest
income - FTE grew $25.1 million, an increase of 15% compared to 2021, while
the net interest margin (“NIM”) - FTE increased to 3.50%
from 3.17% in the prior year due to the higher interest rate environment as well as the mix shift
from cash into higher earning assets as noted
above.
The NIM - FTE also benefited from a 31% increase in non-interest-bearing
deposits which benefited the NIM-FTE 4 basis points. We
currently expect the net interest margin to remain flat or slightly increase in
2023 as we currently anticipate a slowdown in the trajectory of
interest rate increases. We currently anticipate that competition for deposits will continue
into 2023 as clients seek higher yields.
Non-interest Income
The components of non-interest income were as follows for the periods
shown:
For the Year Ended December 31,
Change
$
%
(Dollars in thousands)
Service charges and fees on customer accounts
$
6,228
$
4,580
$
1,648
%
Realized gains on available-for-sale securities
1,023
(927)
(91)
Gain on sale of loans
-
-
Gains (losses), net on equity securities
(181)
(6,325)
6,144
(97)
Income from bank-owned life insurance
1,602
3,483
(1,881)
(54)
Swap fees and credit valuation adjustments, net
(87)
(32)
ATM and credit card interchange income
6,523
7,996
(1,473)
(18)
Other non-interest income
2,778
2,628
Total non-interest income
$
17,281
$
13,660
$
3,621
%
Non-interest income to average assets
0.30
%
0.24
%
The changes in non-interest income were driven by the following:
Service charges and fees on customer accounts -
This category includes account analysis fees offset by a customer
rebate program. The
increase for the year ended December 31, 2022 compared to 2021
was driven by a decline in costs associated with our rebate program. In
addition, customer growth and an increase in outstanding balances improved
account analysis fees.
62%
9%
3%
4%
4%
18%
61%
10%
4%
4%
4%
17%
Salary & benefits
Occupancy
Deposit insurance
Professional fees
Software &
communication
Other
Breakout of Non-interest Expense
Realized gains on available-for-sale securities -
The Company sells AFS securities for strategic reasons including capitalizing on attractive
market conditions, improving the credit quality of the security portfolio, or
for tax purposes,
primarily to offset capital losses. The realized
gains on AFS securities declined from 2021 to 2022
primarily due to the Company selling securities for tax purposes and to capitalize on
attractive market conditions in 2021.
Gains (losses), net on equity securities -
During 2021, the Company recorded a $6 million loss related to an
equity investment received as
part of a modified loan agreement in 2020. The Company elected to account for this security at
cost less impairment, unless an orderly
transaction for an identical or similar investment of the same issuer occurred that
would result in an updated fair market value. During 2021,
significant adverse changes in market conditions for the investment resulted in
the investment being sold below its book value. Refer to the
“Equity Securities” section in
Note 3: Securities
within the Notes to the Consolidated Financial Statements for additional information.
Income from bank-owned life insurance -
The decrease for the year ended December 31, 2022 compared
to 2021 was due to the Company
recognizing $2 million in tax-free death benefits from a bank-owned life insurance policy
in 2021 that did not re-occur in 2022.
ATM and credit card interchange income -
The decrease in ATM and credit card interchange income for the year ended December 31,
2022 compared to 2021 was primarily the result of one large customer that mobilized
their workforce directly impacted by the COVID-19
pandemic during 2020 and into 2021.
This activity did not re-occur in 2022 and accounts for the lower income.
Non-interest Expense
The components of non-interest expense were as follows for the periods indicated:
For the Year Ended December 31,
Change
$
%
(Dollars in thousands)
Salary and employee benefits
$
75,288
$
61,080
$
14,208
%
Occupancy
10,663
9,688
Professional fees
5,275
3,519
1,756
Deposit insurance premiums
3,354
3,705
(351)
(9)
Data processing
4,750
2,878
1,872
Advertising
3,201
2,090
1,111
Software and communication
5,093
4,234
Foreclosed assets, net
(17)
(714)
(102)
Other non-interest expense
14,135
11,491
2,644
Total non-interest expense
$
121,742
$
99,382
$
22,360
%
Non-interest expense to average assets
2.11
%
1.78
%
Non-interest expense increased $22.4 million and included $4.2
million of transaction costs and core deposit intangible amortization
related to the Central acquisition. In addition, the Central acquisition added
approximately $1.7 million of non-interest expense, the majority
in the salary and employee benefits line as we added employees to our
teams.
The ratio of non-interest expense to average assets increased
to 2.11%, in part, due to the Central acquisition as well as increased costs as we continue
to invest in new markets, technology, and
personnel.
The changes in non-interest expense were driven by the following:
Salary and Employee Benefits -
Salary and employee benefit costs increased due to new market expansion, annual merit
increases, the
addition of employees as part of the Central acquisition and increased perform
ance-based incentive compensation.
Occupancy -
Occupancy costs increased due to the adoption of Accounting Standards Codification (“ASC”) 842,
Leases on January 1,
2022 as well as a new lease in our Dallas market resulting from expansion.
We currently expect occupancy costs to increase in 2023 related
to our expansion into the Fort Worth, TX market and may increase further as we enter new markets in the
future.
Professional Fees -
Professional fees increased due to $1.4 million related to the Central Bank acquisition,
$0.3 million in lending related
legal fees and $0.1 million due to recruiting fees.
Data Processing
-
Data processing expense increased due to the Central acquisition, account
growth and costs related to our digital
banking conversion.
Advertising
-
The increase in advertising costs was driven by increased post-pandemic activities.
Software and Communication -
The increase was driven by our continued investment in best-in-class technologies.
In addition to the
growing number of technologies implemented, a portion of the increase
in costs was due to our growth.
Foreclosed Assets, net -
The decrease in foreclosed assets, net was due to the Company selling a foreclosed commercial use
facility
during 2021 at a loss.
Other non-interest expense -
The increase was due to employee separation expense of $1.1 million and higher
travel and entertainment
costs in 2022 due to an increase in post-pandemic activities.
Our GAAP efficiency ratio for 2022 was 57.75% and our adjusted efficiency ratio - FTE was 54.43%. See below
under “Non-
GAAP Financial Measures” for a reconciliation. We currently expect to manage the efficiency ratio lower through 2023 as we finish
the
integration of Central and scale investments in new markets.
Income Taxes
Our income tax expense differs from the amount that would be calculated
using the federal statutory tax rate, primarily from
investments in tax advantaged assets, such as bank-owned life insurance
and tax-exempt municipal securities, state tax credits and permanent
tax differences from equity-based compensation. In addition, 2022
included a $0.3 million charge related to certain non-deductible
acquisition costs in connection with the Central acquisition. Detail behind
the differences between the statutory rate and effective tax rate for
the years ended December 31, 2022, 2021 and 2020 is provided in
Note 12: Income Taxes
within the Notes to the Consolidated Financial
Statements.
The tax-exempt benefit diminishes as the Company’s ratio of taxable income
to tax-exempt income increases. We currently anticipate
the effective tax rate to remain in the range of 20% to 22% for 2023. A three-year trend of our income tax and effective tax rate is presented
below:
For the Year Ended December 31,
(Dollars in thousands)
Income tax expense
$
15,973
$
17,556
$
2,713
Income before income taxes
$
77,572
$
86,969
$
15,314
Effective tax rate
%
%
%
Non-GAAP Financial Measures
In addition to disclosing financial measures determined in accordance
with U.S. generally accepted accounting principles (GAAP), the
Company discloses certain non-GAAP financial measures including “tangible common
stockholders’ equity,” “tangible book value per
share,” “adjusted efficiency ratio - FTE,” “adjusted net income,” “adjusted
diluted earnings per share,” “adjusted return on average assets,”
and “adjusted return on average common equity.”
We consider the use of select non-GAAP financial measures and ratios to be useful for
financial and operational decision making and useful in evaluating period-to-period
comparisons. We believe that these non-GAAP financial
measures provide meaningful supplemental information
to investors regarding our performance by excluding certain expenditures or gains
that we believe are not indicative of our primary business operating results. We believe that management
and investors benefit from referring
to these non-GAAP financial measures in assessing our performance and when planning,
forecasting, analyzing and comparing past, present
and future periods.
These non-GAAP financial measures should not be considered a substitute for financial information presented
in accordance with
GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures
we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by
providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation
of the
impact of the components adjusted for in the non-GAAP financial measure so that both measures and the
individual components may be
considered when analyzing our performance.
A reconciliation of non-GAAP financial measures to the comparable GAAP financial measures follows.
For the Year Ended
12/31/2022
12/31/2021
12/31/2020
(Dollars in thousands, except per share data)
Adjusted net income:
Net income
$
61,599
$
69,413
$
12,601
Add: Acquisition costs
3,890
-
-
Add: Acquisition - Day 1 CECL provision
4,400
-
-
Add: Employee separation
1,063
-
-
Add: Unrealized loss on equity security
-
6,200
-
Add: Accelerated employee benefits
-
-
Less: BOLI settlement benefits
(1)
-
(1,841)
-
Add: Goodwill impairment
(1)
-
-
7,397
Less: Tax effect
(2)
(2,335)
(1,512)
-
Adjusted net income
$
68,617
$
72,979
$
19,998
Diluted weighted average common shares outstanding
50,002,054
52,030,582
52,548,547
Diluted earnings per share
$
1.23
$
1.33
$
0.24
Adjusted diluted earnings per share
$
1.37
$
1.40
$
0.38
(1)
No tax effect.
(2)
Represents the tax impact of the adjustments at a tax rate of 21.0%, plus permanent
tax expense associated with merger related
transactions and permanent tax benefit associated with stock-based
grants
For the Year Ended
12/31/2022
12/31/2021
12/31/2020
(Dollars in thousands)
Adjusted return on average assets:
Net income
$
61,599
$
69,413
$
12,601
Adjusted net income
68,617
72,979
19,998
Average assets
$
5,760,031
$
5,591,471
$
5,358,479
Return on average assets
1.07
%
1.24
%
0.24
%
Adjusted return on average assets
1.19
%
1.31
%
0.37
%
For the Year Ended
12/31/2022
12/31/2021
12/31/2020
(Dollars in thousands)
Adjusted return on common equity:
Net income
$
61,599
$
69,413
$
12,601
Adjusted net income
68,617
72,979
19,998
Average common equity
$
617,582
$
640,202
$
614,276
Return on average common equity
9.97
%
10.84
%
2.05
%
Adjusted return on average common equity
11.11
%
11.40
%
3.26
%
For the Year Ended
12/31/2022
12/31/2021
12/31/2020
(Dollars in thousands, except per share data)
Tangible common stockholders' equity:
Total stockholders' equity
$
608,599
$
667,573
$
624,428
Less: goodwill and other intangible assets
29,081
Tangible common stockholders' equity
$
579,518
$
667,443
$
624,220
Tangible book value per share:
Tangible common stockholders' equity
$
579,518
$
667,443
$
624,220
Shares outstanding at end of period
48,448,215
50,450,045
51,679,516
Book value per share
$
12.56
$
13.23
$
12.08
Tangible book value per share
$
11.96
$
13.23
$
12.08
For the Year Ended
12/31/2022
12/31/2021
12/31/2020
(Dollars in thousands)
Adjusted Efficiency Ratio - FTE
(1)
Non-interest expense
$
121,742
$
99,382
$
99,968
Less: Acquisition costs
(3,890)
-
-
Less: Core deposit intangible amortization
(291)
-
-
Less: Employee separation
(1,063)
-
-
Less: Accelerated employee benefits
-
(719)
-
Less: Goodwill impairment
-
-
(7,397)
Adjusted Non-interest expense (numerator)
$
116,498
$
98,663
$
92,571
Net interest income
193,534
168,691
160,249
Tax equivalent interest income
(1)
3,221
2,948
2,732
Non-interest income
17,281
13,660
11,733
Add: Unrealized loss on equity security
-
6,200
-
Less: BOLI settlement benefits
-
(1,841)
-
Total tax-equivalent income (denominator)
$
214,036
$
189,658
$
174,714
Efficiency Ratio
57.75
%
54.50
%
58.13
%
Adjusted Efficiency Ratio - FTE
(1)
54.43
%
52.02
%
52.98
%
(1)
Tax exempt income (tax-free municipal securities) is calculated on a tax equivalent
basis. The incremental tax rate used is 21.0%.
Discussion and Analysis - Financial
Condition
Loan Portfolio
At December 31, 2022, our loan portfolio was comprised of new loans
that we have originated and loans that were acquired on
November 22, 2022 in the acquisition of Central.
Certain of the comparative graphs below are excluding the Central loans and
are so noted.
Loans represent our largest portion of earning assets and typically provide higher
yields than other assets. The quality and
diversification of the loan portfolio is an important consideration when
reviewing our financial condition. We established an internal loan
policy that outlines a standard lending philosophy and provides consistent direction
to achieve goals and objectives, which include
maximizing earnings over the short and long term by managing risks through
the policy. Internal concentration limits exist on all loans,
including commercial real estate, energy, and land development. We established strong
underwriting practices and procedures to assess our
borrowers, including review of debt service, collateral value and evaluation
of guarantors. We also engage third-parties to independently
review our loan portfolio. Appropriate actions are taken when a borrower is no longer able to service its debt.
Our loan portfolio consists of various types of loans, primarily made up of commercial
and industrial and commercial real estate loans.
Commercial and industrial loans are generally paid back through normal business
operations. Commercial real estate loans, which include
both construction and limited term financing are typically paid back through
normal income from operations, the sale of the underlying
property or refinancing by other institutional sources. Most of our loans are made
to borrowers within the states we operate, which include
Kansas, Missouri, Oklahoma, Arizona, Texas, Colorado and New Mexico. In addition, we occasionally invest
in syndicated shared national
credits and loan participations.
16%
8%
15%
10%
8%
3%
8%
6%
5%
21%
16%
11%
11%
9%
9%
4%
5%
6%
6%
23%
Commercial and Industrial Loan Portfolio by Industry
12/31/2022
12/31/2021
The following table presents the balance and associated percentage of
each major product type within our portfolio as of the dates
indicated:
As of
December 31, 2022
As of
December 31, 2021
December 31, 2021 vs.
December 31, 2022
% Change
(Dollars in thousands)
Commercial and industrial
(1)
$
1,017,678
$
843,024
20.7
%
Commercial and industrial lines of credit
957,254
617,398
55.0
Energy
173,218
278,579
(37.8)
Commercial real estate
1,718,947
1,278,479
34.5
Construction and land development
794,788
574,852
38.3
Residential real estate
409,124
360,046
13.6
Multifamily real estate
237,984
240,230
(0.9)
Consumer
63,736
63,605
0.2
Total
$
5,372,729
$
4,256,213
26.2
%
(1) Total includes PPP loans of $3.2 million and $64.8 million as of December 31, 2022 and 2021, respectively
For a description of the Company’s loan segments refer to the “Loan Portfolio
Segments” section within
Note 4: Loans and Allowance
for Credit Losses
within the Notes to the Consolidated Financial Statements.
Commercial and Industrial Loans
The Company provides a mix of variable- and fixed-rate commercial
and industrial loans across various industries. We extend
commercial and industrial loans on an unsecured and secured basis. Unsecured
commercial and industrial loan balances totaled $271 million
or 5% of the total loan portfolio as of December 31, 2022 compared to $126 million or 3% as of
December 31, 2021.
Our commercial and industrial loan portfolio is comprised of diverse industry segments. A breakdown of the Company’s commercial
and industrial loan portfolio by industry, excluding the loans acquired from
Central, as of December 31, 2022 and 2021 is provided below:
16%
6%
6%
3%
6%
5%
2%
3%
5%
5%
5%
25%
13%
16%
5%
8%
3%
4%
6%
3%
2%
4%
4%
5%
25%
15%
Real Estate Loan Portfolio by Segment
12/31/2022
12/31/2021
29%
18%
13%
7%
6%
27%
30%
18%
16%
9%
3%
24%
TX
KS
OK
MO
AZ
Remaining
States
Real Estate Loan Portfolio by Geography
12/31/2022
12/31/2021
Real Estate Loans
Our real estate portfolio is comprised of construction and development loans,
residential family and multifamily loans and commercial
real estate loans. Our Real Estate portfolio,
excluding Central, is predominately in-market relationships with 73% of
Real Estate loans
located within our footprint of Kansas, Missouri, Texas, Oklahoma and Arizona as of December 31, 2022, based on the geographical
location
of the collateral.
A breakdown of our real estate portfolio by type and geography (based upon location of collateral), excluding the loans
acquired from Central, as of December 31, 2022 and 2021 is presented
below:
The following table shows the contractual maturities of our gross loans and
sensitivity to interest rate changes:
As of December 31, 2022
Due in One Year
or Less
Due in One Year
through Five
Years
Due in Five Year
through
Fifteen Years
Due after Fifteen Years
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Total
(Dollars in thousands)
Commercial and industrial
$
89,571
$
116,378
$
308,284
$
341,195
$
46,807
$
93,496
$
19,589
$
2,358
$
1,017,678
Commercial and industrial lines of credit
47,360
388,302
21,288
464,461
16,101
19,742
-
-
957,254
Energy
-
29,159
143,143
-
-
-
-
173,218
Commercial real estate
64,215
221,690
477,324
452,410
179,940
262,030
8,846
52,492
1,718,947
Construction and land development
28,382
81,548
82,146
492,424
30,608
34,787
3,661
41,232
794,788
Residential real estate
4,380
2,630
21,987
4,846
68,818
5,856
300,230
409,124
Multifamily real estate
4,379
60,235
61,750
98,023
4,864
8,733
-
-
237,984
Consumer
3,449
12,356
8,669
12,656
24,612
-
1,623
63,736
Total
$
241,736
$
912,298
$
982,364
$
2,009,158
$
347,509
$
449,256
$
32,473
$
397,935
$
5,372,729
Provision and Allowance for Credit Losses (“ACL”)
The Company implemented the CECL model as of January 1, 2022. Refer
to
Note 1: Nature of Operations and Summary of
Significant Accounting Policies
and
Note 4: Loans and Allowance for Credit Losses
within the Notes to Consolidated Financial Statements
for details regarding the transition, including the impact to the financial statements.
The CECL model compared to the incurred loss model
may accelerate the provision for credit losses if the Company’s
loan portfolio continues to grow.
In addition, positive (negative) forward-
looking indicators may decrease (increase) the required provision for
credit losses.
The ACL at December 31, 2022 represents our best estimate of the expected credit losses in the Company’s loan portfolio and off-
balance sheet commitments, measured over the contractual life of the underlying
instrument.
For the Year Ended December 31,
Asset quality
(Dollars in thousands)
Provision for credit losses
(1)
- loans
$
7,997
$
(4,000)
$
56,700
Provision for credit losses
(1)
- off-balance sheet
3,504
N/A
N/A
Allowance for credit losses
(2)
- loans
61,775
58,375
75,295
Allowance for credit losses
(2)
- off-balance sheet
8,688
N/A
N/A
Net charge-offs
$
3,765
$
12,920
$
38,301
(1)
Prior to 2022, this line represents the provision for loan losses
(2)
Prior to 2022, this line represents the allowance for loan and lease losses
Upon adoption of the CECL model, the Company established a reserve for unfunded commitments (“RUC”) and
reduced the ACL
$1.7 million as of January 1, 2022.
During 2022, the ACL increased by $3.4 million due to $4.6 million in Central Day 1 CECL provision
on non-PCD loans and a $0.9 million Central Day 1 provision on PCD loans.
In addition, the ACL grew $12.8 million due to loan growth
and changes in credit quality and economic factors.
These increases were partially offset by the day 1 impact of CECL adoption noted
above of $1.7 million, $3.8 million in net charge-offs, and a reduction
in reserves on impaired loans of $9.4 million.
January 1, 2022, the adoption date, is presented below instead of December
31, 2021 for comparability purposes. The allocation in one
portfolio segment does not preclude its availability to absorb losses in other segments. The table below
presents the allocation of the
allowance for credit losses as of the dates indicated:
December 31, 2022
January 1, 2022
ACL Amount
ACL Amount
Loans
Off-
Balance
Sheet
Total
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
Loans
Off-
Balance
Sheet
Total
Percent of
ACL to
Total ACL
Percent of
Loans to
Total Loans
(Dollars in thousands)
Commercial and industrial
$
12,272
$
$
12,517
%
%
$
10,139
$
$
10,246
%
%
Commercial and industrial lines of credit
14,531
14,605
8,866
8,910
Energy
4,396
5,183
9,190
9,455
Commercial real estate
19,504
20,204
18,933
19,644
Construction and land development
5,337
6,830
12,167
3,666
3,914
7,580
Residential real estate
3,110
3,145
3,046
3,051
Multifamily real estate
2,253
2,267
2,465
2,602
Consumer
Gross loans
$
61,775
$
8,688
$
70,463
%
%
$
56,628
$
5,184
$
61,812
%
%
Refer to
Note 4: Loans and Allowance for Credit Losses
within the Notes to Consolidated Financial Statements for a summary
of the
changes in the ACL. Provided below is additional information regarding changes to the ACL:
Charge-offs and Recoveries
The below table provides the ratio of net charge-offs (recoveries) to average
loans outstanding based on our loan categories for the
periods indicated:
For the Year Ended December 31,
Commercial and industrial
-
%
0.07
%
2.41
%
Commercial and industrial lines of credit
0.31
2.69
1.21
Energy
1.19
0.32
1.24
Commercial real estate
(0.09)
-
0.14
Residential real estate
0.05
(0.08)
0.11
Multifamily real estate
-
(0.01)
-
Consumer
(0.01)
0.04
0.14
Total net charge-offs to average loans
0.08
%
0.30
%
0.89
%
For the year ended December 31, 2022, charge-offs primarily related
to three commercial and industrial and commercial and industrial
line of credit borrowers, three energy borrowers and two non-owner
occupied commercial real estate borrowers who were unable to meet
their debt obligations.
Recoveries totaled $7.0 million for the year ended December 31, 2022 and were primarily
related to six commercial
and industrial loans/lines of credit, two energy loans and two non-owner occupied commercial real
estate loans that were previously charged-
off.
Non-performing assets and past due loans
Non-performing assets include: (i) non-performing loans - includes non-accrual
loans, loans past due 90 days or more and still
accruing interest, and loans modified under TDRs that are not performing in accordance
with their modified terms; (ii) foreclosed assets held
for sale; (iii) repossessed assets; and (iv) impaired debt securities.
The table below summarizes our non-performing assets and related ratios as of
the dates indicated:
For the Year Ended December 31,
Asset quality
(Dollars in thousands)
Non-accrual loans
$
11,272
$
31,432
$
75,051
Loans 90+ days past due and still accruing
1,024
Total non-performing loans
12,022
31,522
76,075
Foreclosed assets held-for-sale
1,130
1,148
2,347
Total non-performing assets
$
13,152
$
32,670
$
78,422
Loans 30 - 89 days past due
$
19,519
$
3,529
$
18,078
Asset quality metrics (%)
Non-performing loans to total loans
0.22
%
0.74
%
1.71
%
Non-performing assets to total assets
0.20
0.58
1.39
ACL to total loans
1.15
1.37
1.70
ACLs + RUC to total loans
(1)
1.31
N/A
N/A
ACL to non-performing loans
Classified Loans / (Capital + ACL)
10.1
10.8
40.9
Classified Loans / (Capital + ACL + RUC)
(1)
10.0
N/A
N/A
(1)
Includes the accrual for off-balance sheet credit risk from unfunded
commitments that resulted from CECL adoption on January 1, 2022.
Credit quality metrics were significantly improved compared to the prior
year. Non-performing assets decreased to $13.2 million at
December 31, 2022 entirely due to a $20.2 million decrease in non-accrual
loans. The decline is attributable primarily to payments and
payoffs on non-accrual energy, commercial and industrial and commercial real
estate loans during the year. The non-performing assets to
total assets ratio decreased to 0.20% at December 31, 2022 from 0.58%
at December 31, 2021. Classified loans decreased $11.2 million
during the year but included the addition of $5.7 million from Central. Without Central, classified
assets decreased $16.9 million due to
reductions in classified energy, commercial and industrial and commercial real
estate loans.
Loans 30-89 days past due increased $16.0
million primarily due to administrative past dues which were short-term
in nature.
Investment Portfolio
Our investment portfolio is governed by our investment policy that sets our
objectives, limits and liquidity requirements among other
items. The portfolio is maintained to serve as a contingent, on-balance sheet source
of liquidity. The objective of our investment portfolio is
to optimize earnings, manage credit risk, ensure adequate liquidity, manage
interest rate risk, meet pledging requirements and meet
regulatory capital requirements. Our investment portfolio is generally
comprised of government sponsored entity securities and U.S. state
and political subdivision securities with limits set on all types of securities.
At the date of purchase, all debt securities are classified as AFS securities. Since interest rates move in cycles, having an AFS portfolio
allows management to: (i) protect against additional unrealized market valuation
losses; (ii) provide more liquidity as rates rise, which often
coincides
with increasing loan demand and slower deposit growth; and (iii) generate
more money to reinvest when rates are higher giving the
institution an opportunity to lock in higher yields. In the event the AFS portfolio becomes too large given the constraints
set in the policy,
investments may be classified as held-to-maturity. Held-to-maturity
classification will only be used if we have the intent and ability to hold
the investment to its maturity.
At December 31, 2022, AFS debt securities decreased $59 million or 8% from the prior year-end primarily
due to the $112 million
increase in unrealized losses. During 2022, the Company purchased $50 million
of tax-exempt municipal securities, $48 million of mortgage-
backed securities, $10 million of SBA, and $6 million of corporate
securities.
During 2021, the Company purchased $117 million of tax-
exempt municipal securities and $108 million of mortgage-backed
securities primarily to deploy liquidity into higher yielding interest-
earning assets.
For information related to the book value and fair value of our AFS securities at December 31, 2022 and 2021
refer to the “Available-
for-Sale Securities” segment in
Note 3: Securities
within the Notes to the Consolidated Financial Statements. For information
related to the
investment maturity schedule and weighted average yield for each range of maturities
refer to the “Maturity Schedule” segment in
Note 3:
Securities
within the Notes to the Consolidated Financial Statements.
Bank-Owned Life Insurance
The Company maintains investments in BOLI policies to help control employee
benefit costs, as a protection against loss of certain
employees and as a tax planning strategy. The decrease in yield during 2022 was primarily due
to the Company recognizing $2 million in
tax-free death benefits from a BOLI policy in 2021, coupled with movements
in the insurance carrier’s underlying investments and operating
costs that decreased the overall income on the underlying asset.
The following table provides the balance of BOLI income earned and tax-equivalent
yield for the periods indicated:
As of or For the Year Ended December 31,
(Dollars in thousands)
Ending balance
$
69,101
$
67,498
$
67,498
Income earned
$
1,602
$
3,483
$
1,809
Tax-equivalent yield
(1)
2.9
%
6.4
%
3.4
%
(1)
Tax exempt income is calculated on a tax-equivalent basis. BOLI income is exempt from federal and state taxes. The incremental tax rate used is 24.7%
between 2020 and 2022.
Deposits
The following table sets forth deposit balances by certain categories as of
the dates indicated and the percentage of each deposit
category to total deposits:
As of
December 31, 2022
As of
December 31, 2021
December 31, 2021 vs.
December 31, 2022
% Change
(Dollars in thousands)
Non-interest-bearing deposits
$
1,400,260
$
1,163,224
20.4
%
Transaction deposits
543,801
536,225
1.4
Savings and money market deposits
2,761,680
2,359,761
17.0
Time deposits
(1)
945,567
624,387
51.4
Total deposits
$
5,651,308
$
4,683,597
20.7
%
Total uninsured deposits
(2)
$
2,449,506
$
2,413,533
(1)
Includes $382 million and $91 million of brokered deposits, representing
40% and 15% of time deposits for the years ended December
31, 2022 and 2021, respectively.
(2)
Based on estimated amounts of uninsured deposits and are based on the
same methodologies and assumptions used for the Bank’s
regulatory reporting requirements.
Deposits originate from our markets as well as through participation in certain wholesale
programs. Deposit accounts are added by
loan cross-selling, client referrals and involvement within our community. The Company
offers a variety of deposit products including non-
interest-bearing demand deposits and interest-bearing deposits that include
transaction accounts (including NOW accounts), savings
accounts, money market accounts, and certificates of deposit. The Bank also acquires
brokered deposits, internet subscription certificates of
deposit, and reciprocal deposits through the Intrafi Network. The reciprocal deposits include
both the Certificate of Deposit Account Registry
Service and Insured Cash Sweep program. The Company is a member of the Intrafi
Network which effectively allows depositors to receive
FDIC insurance on amounts greater than the FDIC insurance limit, which is currently
$250 thousand. The Intrafi Network allows institutions
to break large deposits into smaller amounts and place them in a network of other
Intrafi Network institutions to ensure full FDIC insurance
is gained on the entire deposit.
At December 31, 2022, deposits increased $968 million, or 21%, from
the prior year-end including $570
million from the Central
acquisition.
Non-interest-bearing deposits increased $237 million or 20% from December
31, 2021 to December 31, 2022, including $225
million from the Central acquisition. The increase in non-interest-bearing deposits
was driven by approximately $544 million of increased
deposits from current clients and approximately $189 million from new
deposit relationships and $225 million from Central, partially offset
by deposit withdrawals.
At both December 31, 2022
and 2021, non-interest-bearing deposits represented 25% of total deposits. Transaction
deposits and savings and money market deposits increased $409 million
at December 31, 2022 as compared to December 31, 2021, as a
result of new deposit relationships,
increased deposits from current clients and the acquisition of Central. Time deposits increased
by $321
million during 2022. Approximately $489 million of time deposits matured in 2022, offset by $829
million of new and renewed time
deposits.
Brokered time deposits increased during 2022 to meet short-term liquidity needs.
The following table sets forth the maturity of time deposits as of December
31, 2022:
As of December 31, 2022
Three Months or
Less
Three to Six
Months
Six to Twelve
Months
After Twelve
Months
Total
(Dollars in thousands)
Time deposits in excess of FDIC insurance limit
$
24,769
$
26,203
$
49,409
$
211,123
$
311,504
Time deposits below FDIC insurance limit
164,871
168,450
155,278
145,464
634,063
Total time deposits
$
189,640
$
194,653
$
204,687
$
356,587
$
945,567
Other Borrowed Funds
Since it may not be possible to achieve the institution’s overall funding needs
through core deposit funding, other borrowings may be
used to support asset growth. The risks associated with other borrowings are addressed in the same
fashion as other financial condition risks
incurred by the Bank. Credit risk, interest rate risk, concentration risk, capital
adequacy and liquidity are measured for the consolidated
statement of financial condition as a whole, including any wholesale funding
strategies that have been implemented or are expected to be
implemented.
The following table sets forth the amounts outstanding and weighted
average interest rate of our borrowings as of the dates indicated:
As of December 31,
Amount
Weighted Average
Interest Rate
Amount
Weighted Average
Interest Rate
Amount
Weighted Average
Interest Rate
(Dollars in thousands)
Repurchase agreements
$
-
-
%
$
-
-
%
$
2,306
0.15
%
Federal funds purchased
20,000
4.65
-
-
-
-
FHLB borrowings
(1)
218,111
3.02
236,600
1.92
293,100
1.78
Trust preferred securities
(2)
1,061
6.51
1,009
1.94
1.96
TIB line of credit
5,000
7.50
-
-
-
-
SBA loan secured borrowings
9,396
N/A
-
-
-
-
Total other borrowings
$
253,568
3.41
%
$
237,609
1.92
%
$
296,369
1.77
%
(1)
Includes FHLB advances and FHLB line of credit.
(2)
The difference between the interest rate above and the interest rate
in the table below is due to the Company assuming a liability
with a fair value of $1 million related to
the assumption of trust preferred securities issued by Leawood
Bancshares Statutory Trust I for $4 million on September
30, 2005. In 2012, the Company settled litigation
related to the trust preferred securities which decreased the principal
balance by $2 million and the recorded balance by
approximately $400 thousand. The difference
between the recorded amount and the contract value of
$3 million is being accreted to the maturity date in
2035.
For a description and general terms of the other borrowed funds, refer
to
Note 11: Borrowing Arrangements
within the Notes to the
Consolidated Financial Statements.
The following table sets forth the maximum amount at any month end during the
reporting period, the weighted average interest rate
and the average balance of other borrowings during the reported period
for the years indicated:
For the Year Ended
December 31,
Maximum
Amount
Outstanding at
Any Month End
Average
Amount
Weighted
Average
Interest Rate
Maximum
Amount
Outstanding at
Any Month End
Average
Amount
Weighted
Average
Interest Rate
Maximum
Amount
Outstanding at
Any Month End
Average
Amount
Weighted
Average
Interest Rate
(Dollars in thousands)
Repurchase agreements
$
5,695
$
0.13
%
$
6,218
$
1,821
0.15
%
$
57,259
$
32,265
0.49
%
Federal funds purchased
20,000
7,836
1.22
-
-
-
30,000
2,589
0.19
Federal reserve discount
window
-
-
-
-
-
-
15,000
1,055
0.24
FHLB borrowings
(1)
326,600
224,182
2.11
293,100
277,558
2.10
470,659
382,047
1.66
Trust preferred securities
1,061
1,031
8.83
1,009
5.05
11.34
TIB line of credit
5,000
-
-
-
-
-
-
-
SBA loan secured borrowings
$
10,897
1,170
N/A
$
-
-
-
$
-
-
-
Total other borrowings
$
235,073
2.10
%
$
280,361
2.10
%
$
418,895
1.58
%
(1)
Includes FHLB advances and FHLB line of credit.
Liquidity and Capital Resources
Contractual Obligations and Off-Balance Sheet Arrangements
The Company is subject to contractual obligations made in the ordinary
course of business. The obligations include deposit liabilities,
other borrowed funds, and operating leases. Refer to
Note 11: Borrowing Arrangements
within the Notes to the Consolidated Financial
Statements for a listing of our December 31, 2022 significant contractual
cash obligations to third parties on debt obligations. Refer to
Note
6: Leases
within the Notes to the Consolidated Financial Statements for a
summary of our contractual cash obligations to third parties on
lease obligations.
As a financial services provider, the Company is a party to various financial instruments
with off-balance sheet risks, such as
commitments to extend credit. Off-balance sheet arrangements represent the
Company’s future cash requirements. However, a portion of
these commitments may expire without being drawn upon. Refer to
Note 21: Commitments and Credit Risk
within the Notes to the
Consolidated Financial Statements
for a listing of our December 31, 2022 off-balance sheet arrangements.
The Company’s short-term and long
-term contractual obligations, including off-balance
sheet obligations, may be satisfied through
our on-balance sheet and off-balance sheet liquidity
discussed below.
Liquidity
Liquidity is the ability to generate adequate amounts of cash from depositors,
stockholders, profits or other funding sources, to meet
our needs for funding, including payments to borrowers, operational
costs, capital requirements and other strategic cash flow needs.
Our liquidity policy governs our approach to our liquidity position. The objective is to maintain
adequate, but not excessive, liquidity
to meet the daily cash flow needs of our clients while attempting to achieve
adequate earnings for our stockholders. Our liquidity position is
monitored continuously by our finance department.
Liquidity resources can be derived from two sources: (i) on-balance
sheet liquidity resources, which represent funds currently on the
consolidated statement of financial condition; and (ii) off-balance sheet liquidity
resources, which represent funds available from third-party
sources. On-balance sheet liquidity resources include overnight funds, short
-term deposits with other banks, AFS securities, and certain other
sources. Off-balance sheet liquidity resources consist of credit lines, wholesale
deposits and debt funding and certain other sources.
On-balance sheet liquidity resources can be broken down into three
sections: (i) primary liquidity resources, which represent liquid
funds that are on the consolidated statement of financial condition; (ii)
tertiary liquidity resources, which represent assets that can be sold
into the secondary market; and (iii) public funds, which represent deposits. Primary
liquidity resources include overnight funds plus short-
term, interest-bearing deposits with other banks and unpledged AFS securities. Tertiary liquidity resources include loans that can
be sold into
the secondary market or through participation and unpledged securities classified
as held-to-maturity. Public funds are another source of
wholesale deposits as they require collateral.
Off-balance sheet liquidity resources require sufficient collateral, in
the form of loans or securities, and have a larger, negative impact
on our capital ratios. As a result, off-balance sheet liquidity has a higher cost on our asset growth compared to deposit growth.
Off-balance
sheet liquidity exists in several forms including: (i) internet subscription
certificates of deposit; (ii) brokered deposits; (iii) borrowing
capacity; (iv) repurchase agreements; or (v) other sources.
Internet subscription certificates of deposit are deposits made through national,
wholesale certificates of deposit funding programs.
These programs are designed to provide funding outside of the Bank’s normal
market or existing client base and allow the Bank to diversify
its wholesale funding resources. This form of funding does not require collateral and generally
cannot be redeemed early. Brokered deposits
are deposits funded through various broker-dealer relationships. The market
for wholesale deposits is well developed. A key feature of this
type of funding is that it is generally unsecured and does not require collateral for
pledging.
Borrowing capacity refers to a form of liability-based funding. Repurchase
agreements are another source of short-term funding in
which a bank agrees to sell a security to a counterparty and repurchase the same or
an identical security from the counterparty at a specified
future date and price. Public funds are another source of wholesale deposits as they
require collateral.
Our short-term and long-term liquidity requirements are primarily met
through cash flow from operations, redeployment of prepaying
and maturing balances in our loan portfolio and security portfolio, increases
in client deposits and wholesale deposits. Other alternative
sources of funds will supplement these primary sources to the extent necessary
to meet additional liquidity requirements on either a short-
term or long-term basis. The Company believes that its current liquidity and access to such
alternative sources of funds will be sufficient to
meet anticipated cash requirements for the next 12 months and thereafter.
The Consolidated Statements of Cash Flows summarize our sources
and uses of cash by type of activity for the years ended
December 31, 2022 and 2021. As of December 31, 2022, we had cash and cash equivalents of $300 million compared
to $483 million at
December 31, 2021. The change in cash and cash equivalents was due to an $80 million increase in
cash provided by operating activities, a
$620 million decrease in cash provided by investing activities primarily
due to strong loan growth and net cash provided by financing
activities of $357 million primarily due to increases in time deposits. During
2022, liquid assets decreased as loan growth outpaced deposit
growth. The decrease was partially offset by net cash activity from the Central acquisition of
$126 million.
As of December 31, 2022, 2021, and 2020, we had the following available
funding:
As of December 31,
(Dollars in thousands)
On-balance sheet liquidity
(1)
$
986,482
$
1,224,253
$
1,046,110
Off-balance sheet liquidity
(2)
770,165
732,748
756,325
Total liquidity
$
1,756,647
$
1,957,001
$
1,802,435
On-balance sheet liquidity
(1)
as a percent of assets
%
%
%
Total liquidity as a percent of assets
%
%
%
(1)
On-balance sheet liquidity represents funds currently on the consolidated statements of financial condition. It consists of overnight funds, short-term
deposits with other banks and unpledged AFS securities.
(2)
Off-balance sheet liquidity represents funds available from third-party sources including credit lines, FHLB, and FRB.
Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Company’s consolidated
financial statements. Refer to Item 1. Business under the
“Supervision and Regulation” section for a detailed discussion regarding
our capital requirements.
Refer to
Note 14: Regulatory Matters
in the Notes to the Consolidated Financial Statements for the table that
summarizes the capital
requirements applicable to the Company and the Bank in order to be considered
“well-capitalized” from a regulatory perspective, as well as
the Company’s and the Bank’s capital ratios as of December 31, 2022
and 2021. The Bank exceeded all regulatory capital requirements
under Basel III, and the Bank was considered to be “well-capitalized” for
the periods ended December 31, 2022 and 2021.
Stockholders’ Equity
For the year ended December 31, 2022, the Company’s stockholders’ equity decreased primarily due to changes to the unrealized
loss
on AFS securities,
the impact of Central and share repurchases, partially offset by an increase in
net income.
Changes in stockholders’ equity for the fiscal years ended December 31, 2020, 2021, and 2022
are provided in the Consolidated
Statements of Stockholders’ Equity. Additional information regarding the Company’s stock activity is provided in
Note 19: Stockholders’
Equity
within the Notes to the Consolidated Financial Statements.
Interest Rate Sensitivity
A primary component of market risk is interest rate volatility. Managing interest rate risk is a key element of our
consolidated
statement of financial condition management. Interest rate risk is the risk that net
interest margins will be eroded over time due to changing
market conditions. Many factors can cause margins to erode including, without
limitation, (i) lower loan demand; (ii) increased competition
for funds; (iii) weak pricing policies; (iv) statement of financial condition
mismatches; and (v) changing liquidity demands. We manage our
sensitivity position in accordance with our interest rate risk policy. The management
of interest rate risk is a three-step process and involves:
(i) measuring the interest rate risk position; (ii) policy constraints; and (iii)
strategic review and implementation.
Our exposure to interest rate risk is managed by the Bank’s Asset/Liability Committee (“ALCO”) in accordance
with policies
approved by the Bank’s board of directors. ALCO uses a combination of three systems to measure the statement of financial
condition’s
interest rate risk position. Because each system serves a different purpose and
provides a different perspective, the three systems in
combination are expected to provide a better overall result than a single system alone. The three systems include:
(i) gap reports; (ii) earnings
simulation; and (iii) economic value of equity (“EVE”).
•
A gap report measures the repricing volume of assets and liabilities by time period. The difference between repricing assets and
repricing liabilities for a particular time period is known as the periodic repricing
gap. Using this method, it is possible to estimate
the impact on earnings of a given rate change. As a method of evaluating interest rate risk, the gap report is a reasonably
accurate
method of assessing earnings exposure. However, its reliability diminishes
as statement of financial condition complexity increases.
Optionality and other factors complicate the analysis.
•
An earnings simulation measures the effect of changing interest rates on net interest
income and earnings. Earnings simulation is
more detailed than gap analysis. Under this approach, the repricing characteristics
of each asset and liability instrument are
programmed into a computer simulation model. This programming allows the Bank
to refine important characteristics such as caps,
floors, and time lag. It also allows the Bank to include the impact of new business
activity in the analysis. Gap reporting only
considers the existing statement of financial condition position.
•
EVE is a valuation approach to measuring long-term interest rate risk exposure. This approach
considers all future time periods,
which provides an advantage over earnings simulation. However, a negative
attribute of EVE is that it assumes a sustained change
in rates, which is never the case in the long-term. This seeks to compute the financial risk of having
a duration mismatch between
assets and funding.
In addition, ALCO compares the current interest rate risk position to policy limits. This procedure is compliance oriented and results
in either a pass or fail outcome. When the statement of financial condition is in compliance, no
further action is necessary. In instances of
noncompliance, ALCO will develop a plan of action to correct the condition. A summary of the plan and its timing for completion will be
forwarded to the board of directors each quarter until compliance is reestablished.
ALCO also evaluates interest rate risk positioning in light of anticipated
interest rates. The purpose of this comparison is to determine
whether action steps need to be taken to modify current strategy. The results form a
decision-making input for ALCO. If it is determined that
more asset sensitivity is needed, ALCO will either increase rate sensitive assets or reduce rate sensitive liabilities. The opposite
will occur if
less asset sensitivity is desired.
Loan and deposit repricing assumptions are critical in measuring interest rate risk.
For loans, management reviews spreads and
prepayment assumptions. For deposits, management reviews beta
factors and decay assumptions. ALCO reviews and adjusts repricing
assumptions at least annually. Model assumptions are included in the output
reports and reviewed by ALCO on a periodic basis.
When evaluating statement of financial condition rate sensitivity, a proper
analysis of total funding is of critical importance. The
funding side of the statement of financial condition can be segregated
into three broad categories, as follows: (i) funding with defined
maturity dates; (ii) non-maturity deposits; and (iii) perpetual funding.
•
Funding with defined maturity dates includes certificates of deposit and
borrowed funds. The repricing analysis requires a twofold
statement of behavior for each statement of financial condition
category. It requires a cash flow schedule for principal and interest
payments and a repricing schedule of rate adjustments. Once the cash flow
and repricing projections are developed, the category can
be analyzed for interest rate risk exposure.
•
Non-maturity deposits tend to be a longer term, less volatile source
of funds. Non-maturity deposits have very short contractual
lives. The Bank uses historical analysis to develop its decay assumptions, but it looks at aggregate
account types rather than
individual clients. The review analyzes both non-maturity deposits as a whole and individual
deposit categories.
•
Perpetual funding is the most stable and least costly source of funding. Its main
component is equity capital. It has a zero interest
rate and cannot be withdrawn by stockholders because of a rate change.
In effect, it is a perpetual source of free funding.
Periodic independent evaluations are conducted and documented. Each
evaluation consists primarily of: (i) an assessment of internal
controls; (ii) an evaluation of data integrity; (iii) the appropriateness of
the risk management system; (iv) the reasonableness of validity
scenarios; (v) a review of ALCO’s charter; and (vi) validation of calculations. In addition, to ensure the model is working as expected
a back
test of the model is completed at least annually.
All of the assumptions used in our analysis are inherently uncertain and,
as a result, the model cannot precisely measure future net
interest income or precisely predict the impact of fluctuations in market interest
rates on net interest income. Actual results may differ from
the model’s simulated results due to timing, magnitude and frequency
of interest rate changes as well as changes in market conditions and the
application and timing of various management strategies.
On a quarterly basis, we run various simulation models including a static statement of
financial condition and dynamic growth
statement of financial condition. These models test the impact on net interest income and fair value
of equity from changes in market interest
rates under various scenarios. Under the static model and dynamic growth
models, rates are shocked instantaneously and ramped rates
change over a 12-month horizon based upon parallel and nonparallel yield
curve shifts. Parallel shock scenarios assume instantaneous
parallel movements in the yield curve compared to a flat yield curve scenario. Nonparallel
simulation involves analysis of interest income
and expense under various changes in the shape of the yield curve.
Our internal policy regarding internal rate risk simulations currently
specifies that for instantaneous parallel shifts of the yield curve,
estimated net interest income at risk for the subsequent one-year period
should not decline by more than 10% for a -200 basis point shift,
15% for a -300 basis point shift, 5% for a -100 basis point shift, 5% for a 100 basis point
shift, 10% for a 200 basis point shift, and 15% for a
300 basis point shift.
The Company has several instruments that can be used to manage interest rate risk,
including: (i) modifying the duration of interest-
bearing liabilities; (ii) modifying the duration of interest-earning assets, including
our investment portfolio; and (iii) entering into on-balance
sheet derivatives. Based upon the nature of our operations, we are not subject to
foreign exchange or commodity price risk.
ALCO evaluates interest rate risk using a rate shock method and rate ramp method.
In a rate shock analysis, rates change immediately
and the change is sustained over the time horizon. In a rate ramp analysis, rate changes
occur gradually over time. The following tables
summarize the simulated changes in net interest income and fair value of
equity over a 12-month horizon using a rate shock and rate ramp
method as of the dates indicated:
Hypothetical Change in Interest Rate - Rate Shock
December 31, 2022
December 31, 2021
Change in Interest Rate
(Basis Points)
Percent Change in
Net Interest Income
Percent Change in
Fair Value of Equity
Percent Change in
Net Interest Income
Percent Change in
Fair Value of Equity
+300
7.9
%
(9.9)
%
7.9
%
(7.7)
%
+200
5.3
(6.4)
4.6
(4.7)
+100
2.6
(2.7)
1.5
(2.7)
Base
-
%
-
%
-
%
-
%
(2.7)
2.6
NA
(1)
NA
(1)
(5.4)
5.1
NA
(1)
NA
(1)
(11.2)
6.3
NA
(1)
NA
(1)
(1)
The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment.
Hypothetical Change in Interest Rate - Rate Ramp
December 31, 2022
December 31, 2021
Change in Interest Rate
(Basis Points)
Percent Change in Net Interest Income
Percent Change in Net Interest Income
+300
3.4
%
3.4
%
+200
2.3
1.9
+100
1.1
0.6
Base
-
%
-
%
(1.1)
NA
(1)
(2.3)
NA
(1)
(3.9)
NA
(1)
(1)
The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment.
The hypothetical positive change in net interest income as of December
31, 2022
in an up 100 environment is primarily due to
approximately 63% of the Company’s earning assets adjusting within
the first year. In addition, the Company’s time deposits and other
borrowings will continue to mature. Loans remain the largest portion of our
adjustable earning assets, as the mix of adjustable loans or those
maturing in one year was 69%.
The models the Company uses include assumptions regarding interest rates
and balance changes.
These assumptions are inherently
uncertain and, as a result, the model cannot precisely estimate net interest income
or precisely predict the impact of higher or lower interest
rates on net interest income. Actual results may differ from simulated results due to timing, magnitude and frequency
of interest rate changes
as well as changes in market conditions, client behavior and management
strategies, among other factors.
Critical Accounting
Policies and Estimates
Our consolidated financial statements are prepared in accordance
with GAAP and with general practices within the financial services
industry. Application of these principles requires management to make complex and subjective estimates and assumptions
that affect the
amounts reported in the financial statements and accompanying notes. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under current circumstances. These assumptions
form the basis for our judgments about the
carrying values of assets and liabilities that are not readily available from independent,
objective sources. We evaluate our estimates on an
ongoing basis. Use of alternative assumptions may have resulted in significantly
different estimates. Actual results may differ from these
estimates.
The Company qualifies as an EGC under the JOBS Act. Section 107 of the JOBS Act provides that an EGC can take advantage of the
extended transition period when complying with new or revised accounting
standards. This allows an EGC to delay adoption of certain
accounting standards until those standards would apply to private companies;
however, the EGC can still early adopt new or revised
accounting standards, if applicable. We have elected to take advantage of this extended
transition period, which means the financial
statements in this Form 10-K, as well as financial statements we file in the future,
will be subject to all new or revised accounting standards
generally applicable to private companies, unless stated otherwise. This decision will remain
in effect until the Company loses its EGC
status.
Our most significant accounting policies are described in
Note 1: Nature of Operations and Summary of Significant Accounting
Policies
within the Notes to the Consolidated Financial Statements. We identified the
following accounting policies and estimates that, due to
the difficult, subjective or complex judgments and assumptions inherent
in those policies and estimates and the potential sensitivity of our
financial statements to those judgments and assumptions, are critical to
an understanding of our financial condition and results of operations.
Allowance for Credit Losses
The determination of the ACL, which represents management’s estimate of expected lifetime credit loss is recognized
at the origination or
purchase of an asset, including those acquired through a business combination,
which is then reassessed at each reporting date over the
contractual life of the asset. The calculation of expected credit losses includes consideration
of past events, current conditions, and reasonable
and supportable economic forecasts that affect the collectability of the
reported amounts. Generally, expected credit losses are determined
through a pooled, collective assessment of loans and leases with similar risk characteristics.
However, if the risk characteristics of a loan or
lease change such that it no longer matches that of the collectively assessed pool, it is removed
from the population and individually assessed
for credit losses. The total ACL on loans and leases recorded by management represents the aggregated estimated credit loss determined
through both the collective and individual assessments.
See
Note 4: Loans and Allowance for Credit Losses
in the Notes to the Consolidated
Financial Statements for additional information.
Although management believes the levels of the allowance for credit losses at December
31, 2022 are adequate to absorb expected credit
losses, if actual results are materially different from the judgments and uncertainties
made, the Company would be required to increase
(decrease) its credit losses provision resulting in a decrease (increase) in
net income.
Business Combinations
The Company applies the acquisition method of accounting for
business combinations in accordance with ASC 805, Business Combinations.
Under the acquisition method, the acquiring entity in a business combination
recognizes all of the identifiable assets acquired and liabilities
assumed at their acquisition date fair values. Management utilizes prevailing
valuation techniques appropriate for the asset or liability being
measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired,
including identifiable
intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated
to assets acquired and liabilities assumed is
greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed
as incurred.
See
Note 2:
Acquisition Activities
in the Notes to the Consolidated Financial Statements for further informatio
n.
Recent Accounting
Pronouncements
Refer to
Note 1: Nature of Operations and Summary of Significant Accounting Policies
within the Notes to the Consolidated Financial
Statements included elsewhere in this form 10-K.

---

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
The information included under the caption “Interest Rate Sensitivity” in
Management’s Discussion and Analysis is incorporated
herein by reference.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8.
Financial Statements and Supplementary Data
Section
Page Number
Report of FORVIS, LLP Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Note 2: Acquisition Activities
Note 3: Securities
Note 4: Loans and Allowance for Credit Losses
Note 5: Premises and Equipment
Note
: Leases
Note
: Goodwill and Core Deposit Intangibles
Note
: Derivatives and Hedging Activities
Note
: Foreclosed Assets
Note 1
: Interest-bearing Time Deposits
Note 1
: Borrowing Arrangements
Note 12: Income Taxes
Note 1
: Changes in Accumulated Other Comprehensive Income
Note 1
: Regulatory Matters
Note 1
: Employee Benefit Plan
Note 1
: Revenue from Contracts with Clients
Note 17: Stock-Based Compensation
Note 18: Stock Warrants
Note 19: Stockholders’ Equity
Note 20: Disclosure about Fair Market Value of Financial Instruments
Note 21
: Commitments and Credit Risk
Note 2
: Parent Company Condensed Financial Statements
Note 2
: Subsequent Events
Report of Independent Registered Public Accounting Firm
To the Shareholders, Board of Directors and Audit Committee
CrossFirst Bankshares, Inc.
Leawood, Kansas
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of CrossFirst Bankshares,
Inc. (the “Company”) as of December 31, 2022 and 2021, the related
consolidated statements of operations,
comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2022, and the related notes (collectively referred
to as the “financial statements”).
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects,
the financial position of the Company as of December 31, 2022
and 2021, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 2022, in conformity with
accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed
in Note
1 to
the consolidated
financial statements,
the Company
changed its
method of
accounting
for the
recognition
and
measurement
of
credit
losses
as
of
January
1,
2022,
due
to
the
adoption
of ASU
2016-13,
Financial
Instruments
-
Credit
Losses
(Topic
326):
Measurement
of
Credit
Losses
on
Financial
Instruments
and
its
related
amendments.
As discussed in Note 1
to the consolidated financial statements,
the Company changed its method
of accounting for leases
as of January 1, 2022, due to the adoption of ASU 2016-02
Leases
(Topic 842).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express
an opinion on the Company’s consolidated financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (“PCAOB”) and are required to be independent with respect to
the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations
of the Securities
and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the consolidated financial
statements are free of material misstatement, whether due to error or fraud.
Our audits included procedures to assess the risks of material misstatement,
whether due to error or fraud,
and performing procedures that respond to those risks. Such procedures include examining,
on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our audits also included
evaluating the accounting principles used and significant estimates made
by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for
our opinion.
(Formerly, BKD, LLP)
We
have served as the Company’s auditor since 2009.
Kansas City, Missouri
March 3, 2023
See Notes to Consolidated Financial Statements
CrossFirst Bankshares, Inc.
Consolidated Statements of Financial Condition
As of December 31,
(Dollars in thousands)
Assets
Cash and cash equivalents
$
300,138
$
482,727
Available-for-sale securities - taxable
198,808
192,146
Available-for-sale securities - tax-exempt
488,093
553,823
Loans, net of allowance for credit losses of $
61,775
and $
58,375
at December 31, 2022 and
2021, respectively
5,310,954
4,197,838
Premises and equipment, net
65,984
66,069
Restricted equity securities
12,536
11,927
Interest receivable
29,507
16,023
Foreclosed assets held for sale
1,130
1,148
Goodwill and other intangible assets, net
29,081
Bank-owned life insurance
69,101
67,498
Other
95,754
32,128
Total assets
$
6,601,086
$
5,621,457
Liabilities and stockholders’ equity
Deposits
Non-interest-bearing
$
1,400,260
$
1,163,224
Savings, NOW and money market
3,305,481
2,895,986
Time
945,567
624,387
Total deposits
5,651,308
4,683,597
Federal Home Loan Bank advances
218,111
236,600
Other borrowings
35,457
1,009
Interest payable and other liabilities
87,611
32,678
Total liabilities
5,992,487
4,953,884
Stockholders’ equity
Preferred stock, $
0.01
par value:
Authorized -
5,000,000
shares, issued -
none
-
-
Common stock, $
0.01
par value:
Authorized -
200,000,000
shares, issued -
53,036,613
and
52,590,015
shares at December 31, 2022 and 2021, respectively
Treasury stock, at cost:
4,588,398
and
2,139,970
shares held at December 31, 2022 and 2021,
respectively
(64,127)
(28,347)
Additional paid-in capital
530,658
526,806
Retained earnings
206,095
147,099
Accumulated other comprehensive (loss) income
(64,557)
21,489
Total stockholders’ equity
608,599
667,573
Total liabilities and stockholders’ equity
$
6,601,086
$
5,621,457
See Notes to Consolidated Financial Statements
CrossFirst Bankshares, Inc.
Consolidated Statements of Operations
For the Year Ended December 31,
(Dollars in thousands, except per share data)
Interest Income
Loans, including fees
$
224,138
$
174,660
$
183,738
Available-for-sale securities - taxable
4,577
3,273
5,073
Available-for-sale securities - tax-exempt
15,338
14,033
13,013
Deposits with financial institutions
3,751
Dividends on bank stocks
Total interest income
248,513
193,150
203,448
Interest Expense
Deposits
49,982
18,523
36,585
Fed funds purchased and repurchase agreements
Federal Home Loan Bank Advances
4,759
5,837
6,341
Other borrowings
Total interest expense
54,979
24,459
43,199
Net Interest Income
193,534
168,691
160,249
Provision for Credit Losses
11,501
(4,000)
56,700
Net Interest Income after Provision for Credit Losses
182,033
172,691
103,549
Non-Interest Income
Service charges and fees on customer accounts
6,228
4,580
2,803
Realized gains on available-for-sale securities
1,023
1,704
Gain on sale of loans
-
(Losses) gains, net on equity securities
(181)
(6,325)
Income from bank-owned life insurance
1,602
3,483
1,809
Swap fees and credit valuation adjustments, net
(204)
ATM and credit card interchange income
6,523
7,996
4,379
Other non-interest income
2,778
2,628
1,152
Total non-interest income
17,281
13,660
11,733
Non-Interest Expense
Salaries and employee benefits
75,288
61,080
57,747
Occupancy
10,663
9,688
8,701
Professional fees
5,275
3,519
4,218
Deposit insurance premiums
3,354
3,705
4,301
Data processing
4,750
2,878
2,719
Advertising
3,201
2,090
1,219
Software and communication
5,093
4,234
3,750
Foreclosed assets, net
(17)
1,239
Goodwill impairment
-
-
7,397
Other non-interest expense
14,135
11,491
8,677
Total non-interest expense
121,742
99,382
99,968
Net Income Before Taxes
77,572
86,969
15,314
Income tax expense
15,973
17,556
2,713
Net Income
$
61,599
$
69,413
$
12,601
Basic Earnings Per Share
$
1.24
$
1.35
$
0.24
Diluted Earnings Per Share
$
1.23
$
1.33
$
0.24
See Notes to Consolidated Financial Statements
CrossFirst Bankshares, Inc.
Consolidated Statements of Comprehensive (Loss) Income
For the Year Ended December 31,
(Dollars in thousands)
Net Income
$
61,599
$
69,413
$
12,601
Other Comprehensive (Loss) Income
Unrealized (loss) gain on available-for-sale securities
(111,661)
(8,894)
18,847
Less: income tax (benefit) expense
(26,870)
(2,182)
4,606
Unrealized gain (loss) on available-for-sale securities, net of income tax
(84,791)
(6,712)
14,241
Reclassification adjustment for realized gains included in income
1,023
1,704
Less: income tax expense
Reclassification adjustment for realized gains included in income, net of
income tax
1,289
Unrealized loss on cash flow hedges
(1,551)
(562)
-
Less: income tax benefit
(368)
(138)
-
Unrealized loss on cash flow hedges, net of income tax
(1,183)
(424)
-
Other comprehensive (loss) income
(86,046)
(7,914)
12,952
Comprehensive (Loss) Income
$
(24,447)
$
61,499
$
25,553
See Notes to Consolidated Financial Statements
CrossFirst Bankshares, Inc.
Consolidated Statements of Stockholders’ Equity
Preferred Stock
Common Stock
Treasury
Additional
Paid in
Retained
Accumulated
Other
Comprehensive
Shares
Amount
Shares
Amount
Stock
Capital
Earnings
Income (Loss)
Total
(Dollars in thousands)
December 31, 2019
-
$
-
51,969,203
$
$
-
$
519,870
$
64,803
$
16,451
$
601,644
Adoption of ASU 2018-07
-
-
-
-
-
(238)
-
(34)
Net income
-
-
-
-
-
-
12,601
-
12,601
Other comprehensive income - available-for-
sale securities
-
-
-
-
-
-
-
12,952
12,952
Issuance of shares from equity-based awards
-
-
319,926
-
(1,087)
-
-
(1,084)
Open market common share repurchases
-
-
(609,613)
-
(6,061)
-
-
-
(6,061)
Employee receivables from sale of stock
-
-
-
-
-
-
Stock-based compensation
-
-
-
-
-
4,363
-
-
4,363
December 31, 2020
-
-
51,679,516
(6,061)
522,911
77,652
29,403
624,428
Net income
-
-
-
-
-
-
69,413
-
69,413
Other comprehensive loss - available-for-sale
securities
-
-
-
-
-
-
-
(7,490)
(7,490)
Other comprehensive loss - cash flow hedges
-
-
-
-
-
-
-
(424)
(424)
Issuance of shares from equity-based awards
-
-
300,886
-
(689)
-
-
(686)
Open market common share repurchases
-
-
(1,530,357)
-
(22,286)
-
-
-
(22,286)
Employee receivables from sale of stock
-
-
-
-
-
-
-
Stock-based compensation
-
-
-
-
-
4,584
-
-
4,584
December 31, 2021
-
-
50,450,045
(28,347)
526,806
147,099
21,489
667,573
Adoption of ASU 2016-13
-
-
-
-
-
-
(2,610)
(2,610)
Net income
-
-
-
-
-
-
61,599
-
61,599
Other comprehensive loss - available-for-sale
securities
-
-
-
-
-
-
-
(84,863)
(84,863)
Other comprehensive loss - cash flow hedges
-
-
-
-
-
-
-
(1,183)
(1,183)
Issuance of shares from equity-based awards
-
-
446,598
-
(565)
-
-
(561)
Open market common share repurchases
-
-
(2,448,428)
-
(35,780)
-
-
-
(35,780)
Employee receivables from sale of stock
-
-
-
-
-
-
-
Stock-based compensation
-
-
-
-
-
4,417
-
-
4,417
December 31, 2022
-
$
-
48,448,215
$
$
(64,127)
$
530,658
$
206,095
$
(64,557)
$
608,599
See Notes to Consolidated Financial Statements
CrossFirst Bankshares, Inc.
Consolidated Statements of Cash Flows
For the Year Ended December 31,
(Dollars in thousands)
Operating Activities
Net income
$
61,599
$
69,413
$
12,601
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization
5,305
5,260
5,252
Provision for loan losses
11,501
(4,000)
56,700
Accretion of discounts on loans
(252)
-
-
Accretion of discounts and amortization
of premiums on securities
4,288
5,067
6,084
Stock-based compensation
4,417
4,584
4,363
(Gain) loss on disposal of fixed assets
(77)
(123)
Loss on sale of foreclosed assets and related
impairments
(62)
1,156
Gain on sale of loans
(47)
-
(44)
Deferred income taxes
(1,970)
2,664
(5,257)
Net increase in bank owned life insurance
(1,602)
(3,483)
(1,809)
Net gains (losses) on equity securities
6,325
(46)
Net realized gains on available-for-sale securities
(96)
(1,023)
(1,704)
Goodwill impairment
-
-
7,397
Dividends on FHLB stock
(699)
(679)
(983)
Prepayment penalties on extinguishment
of debt
-
-
Changes in:
Interest receivable
(10,970)
1,213
(1,520)
Other assets
1,814
(533)
(103)
Other liabilities
7,023
2,343
(1,735)
Net cash provided by operating activities
80,353
88,371
80,453
Investing Activities
Net change in loans
(732,041)
172,764
(640,029)
Purchases of available-for-sale and equity securities
(116,136)
(225,719)
(76,218)
Proceeds from maturities of available-for-sale
securities
80,091
103,488
142,057
Proceeds from sale of available-for-sale and equity
securities
20,109
20,867
31,810
Proceeds from the sale of foreclosed assets
1,045
Purchase of premises and equipment
(2,569)
(1,211)
(6,093)
Proceeds from the sale of premises and equipment
and related insurance claims
Purchase of restricted equity securities
(13,175)
-
(2,839)
Proceeds from sale of restricted equity
securities
14,352
4,295
5,556
Proceeds from termination of cash flow hedge
3,290
-
-
Proceeds from death benefit on bank owned
life insurance
-
3,483
-
Net cash activity from acquisition
125,749
-
-
Net cash (used in) provided by investing activities
(619,946)
79,203
(544,590)
Financing Activities
Net increase in demand deposits, savings,
NOW and money market accounts
94,529
407,952
967,245
Net increase (decrease) in time deposits
302,889
(419,095)
(196,264)
Net decrease in fed funds purchased and
repurchase agreements
-
(2,306)
(12,615)
Net increase in federal funds sold
20,000
-
-
Proceeds from Federal Home Loan Bank advances
50,000
-
138,000
Repayment of Federal Home Loan Bank
advances
(154,048)
(57,271)
(203,643)
Net proceeds from lines of credit
79,968
-
-
Issuance of common shares, net of issuance
cost
Proceeds from employee stock purchase
plan
Repurchase of common stock
(35,780)
(22,286)
(6,061)
Acquisition of common stock for tax
withholding obligations
(929)
(860)
(1,236)
Net decrease in employee receivables
Net cash provided by (used in) financing activities
357,004
(93,657)
685,627
(Decrease) increase in Cash and Cash
Equivalents
(182,589)
73,917
221,490
Cash and Cash Equivalents, Beginning of Period
482,727
408,810
187,320
Cash and Cash Equivalents, End of Period
$
300,138
$
482,727
$
408,810
Supplemental Cash Flows Information
Interest paid
$
50,604
$
25,287
$
45,619
Income taxes paid
15,499
12,554
9,692
Equity interest assumed in partial satisfaction
of loans
-
-
11,189
Foreclosed assets in settlement of loans
$
-
$
-
$
CrossFirst Bankshares, Inc.
Notes to Consolidated Financial Statements
Note 1:
Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
CrossFirst Bankshares, Inc., a Kansas corporation (the “Company”), is a bank
holding company whose principal activities are the
ownership and management of its wholly owned subsidiary, CrossFirst Bank (the
“Bank”). The Bank has
three
wholly owned subsidiaries:
(i) CrossFirst Investments, Inc., which holds investments in marketable
securities; (ii) CFBSA I, LLC, which can hold foreclosed assets; and
(iii) CFBSA II, LLC, which can hold foreclosed assets.
The Bank is primarily engaged in providing a full range
of banking and financial services to individual and corporate clients through
its branches in: (i) Leawood, Kansas; (ii) Wichita, Kansas; (iii) Kansas City, Missouri; (iv) Oklahoma
City, Oklahoma; (v) Tulsa, Oklahoma;
(vi) Dallas, Texas; (vii) Frisco, Texas; (viii) Phoenix, Arizona (ix) Colorado Springs, Colorado; (x) Denver, Colorado; and (xi)
Clayton, New
Mexico.
The Bank is subject to competition from other financial institutions and the regulation
of certain federal and state agencies and
undergoes periodic examinations by those regulatory authorities.
The Company’s accounting and reporting policies conform to accounting
principles generally accepted in the United States
(“GAAP”). The consolidated financial statements include the accounts of the Compa
ny; the Bank and its wholly-owned subsidiaries,
CrossFirst Investments, Inc., CFBSA I, LLC and CFBSA II, LLC. All significant intercompany accounts and transactions were eliminated in
consolidation.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change relate to
the determination of the allowance for credit losses, valuation of
deferred tax assets, stock-based compensation, derivatives, and fair values
of financial instruments.
For the year ended December 31, 2022, the Company broke out
the “Goodwill and other intangible assets, net” that was previously
reported in “other assets” within the consolidated statements of financial
condition.
As a result, changes within the consolidated statements of
financial condition in the prior periods were made to conform to the current period presentation. The
change was due to goodwill and
intangible assets that were added during 2022 related to the acquisition of
Farmers & Stockmens Bank (“Central”). The change had no
impact on net income.
Summary of Significant Accounting
Policies
Cash Equivalents - The Company considers all liquid investments with original maturities of
three months or less to be cash
equivalents. At December 31, 2022, cash equivalents consisted primarily of both interest-bearing and non-interest-bearing
accounts with
other banks. Approximately $
million of the Company’s cash and cash equivalents were held at the Federal Reserve Bank
of Kansas City
at December 31, 2022. The Company is required to maintain reserve funds in cash and/or on
deposit with the Federal Reserve Bank. The
reserve required at December 31, 2022 was $
. In addition, the Company is required from time to time to place cash collateral with third
parties as part of its back-to-back swap agreements and cash flow hedges. At December 31, 2022,
no
cash collateral was required. At
December 31, 2022, the Company’s cash accounts, excluding funds at the
Federal Reserve Bank and funds required as cash collateral,
exceeded federally insured limits by $
million.
Securities -
Debt securities for which the Company has no immediate plan to sell but which may be
sold in the future, are classified
as available-for-sale (“AFS”) and recorded at fair value, with unrealized gains
and losses excluded from earnings and reported in other
comprehensive (loss) income. Purchase premiums and discounts are recognized
in interest income using the interest method over the terms
of the securities. Gains and losses on the sale of debt securities are recorded on the
trade date and are determined using the specific
identification method.
Equity securities are recorded at fair value with unrealized gains and
losses included in earnings. Gains and losses on the sale of
equity securities are recorded on the trade date and are determined using
the specific identification method.
The Company elected a measurement alternative for three private
equity investments
that did not have a readily determinable fair
value and did not qualify for the practical expedient to estimate fair value using the
net asset value per share. A cost basis was calculated for
the equity investments. The recorded balance will adjust for any impairment or any observable
price changes for an identical or similar
investment of the same issuer.
For AFS securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more
likely than not
that it will be required to sell the security before recovery of its amortized cost basis. If
either of the criteria regarding intent or requirement
to sell is met, the securities’ amortized cost basis is written down to fair value through income. For AFS securities that do not meet the
criteria above, the Company evaluates whether the decline in fair value has resulted
from credit losses or other factors. Management
considers the extent to which fair value is less than amortized cost, any changes
to the rating of the security by a rating agency, and adverse
conditions specifically related to the security, among other factors. If
this assessment indicates that a credit loss exists, the present value of
cash flows expected to be collected from the security is compared to
the amortized cost basis of the security. If the present value of cash
flows expected to be collected is less than the amortized cost basis, a credit loss exists and
an allowance for credit losses is recorded for the
credit loss, limited by the amount that the fair value is less than amortized cost basis. The Company
has elected to exclude accrued interest
receivable (“AIR) from investment securities from the credit loss assessment as interest deemed
uncollectible is written off through interest
income.
Prior to t
he adoption of ASU 2016-13, declines in the fair value of AFS securities below their cost that were deemed to be other-
than-temporarily impaired were reflected in earnings as realized losses.
In estimating other-than-temporary-impairment prior to January 1,
2020, the Company considered, among other things, the severity and duration
of the unrealized loss position; adverse conditions specifically
related to the security; changes in expected future cash flows; downgrades
in the rating of the security by a rating agency; the failure of the
issuer to make scheduled interest or principal payments; whether the Company
had the intent to sell the security; and whether it was more
likely than not that the Company would be required to sell the security.
Loans -
Loans that management has the intent and ability to hold for the foreseeable future or until maturity
or payoff are reported at
their outstanding principal balances adjusted for unearned income,
charge-offs, the allowance for loan losses, any unamortized deferred fees
or costs on originated loans and unamortized premiums or discounts on purchased
loans.
For loans amortized at cost, interest income is accrued based on the unpaid
principal balance. Loan origination fees, net of certain
direct origination costs, as well as premiums and discounts, are deferred and
amortized as a level yield adjustment over the respective term of
the loan.
The accrual of interest on mortgage and commercial loans is discontinued
at the time the loan is 90 days past due unless the credit is
well secured and in process of collection. A credit is considered well secured if it is secured by collateral in the form of liens or pledges of
real or personal property, including securities, that have a realizable value
sufficient to discharge the debt (including accrued interest) in full
or is secured by the guaranty of a financially responsible party. A debt is in the process of collection if collection of the debt is proceeding in
due course either through legal action, including enforcement procedures,
or in appropriate circumstances, through collection efforts not
involving legal action which are reasonably expected to result in repayment
of the debt or in its restoration to a current status. Past due status
is based on contractual terms of the loan. In all cases, loans are placed on non-accrual
or charged off at an earlier date, if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on non-accrual
or charged off are reversed against interest income.
The interest on these loans is accounted for on the cash basis or cost recovery method,
until qualifying for return to accrual. When payments
are received on non-accrual loans, payments are applied to principal unless there
is a clear indication that the quality of the loan has
improved to the point that it can be placed back on accrual status. Loans are
returned to accrual status when all the principal and interest
amounts contractually due are brought current and future payments are reasonably
assured.
Allowance for Credit Losses (“ACL”) - The Company adopted ASU 2016-13,
Measurement of Credit Losses on Financial
Instruments
, effective January 1, 2022. The Current Expected Credit Loss (“CECL”) model
requires an estimate of expected credit losses,
measured over the contractual life of an instrument, that considers forecasts of
future economic conditions in addition to information about
past events and current conditions.
The Company uses a loss-rate ("cohort") method to estimate the expected
allowance for credit losses ("ACL") for all loan pools.
The cohort method identifies and captures the balance of a pool of loans with similar
risk characteristics, as of a particular point in time to
form a cohort, then tracks the respective losses generated by that cohort
of loans over their remaining lives, or until the loans are “exhausted”
(i.e., have reached an acceptable point in time at which a significant majority of all losses are
expected to have been recognized). The
Company has elected to exclude accrued interest receivable from
the ACL process, because a timely write-off policy exists.
Unfunded loan commitments
In addition to the ACL for funded loans, the Company maintains reserves to cover
the risk of loss associated with off-balance sheet
unfunded loan commitments. The allowance for off-balance sheet credit
losses is maintained within the other liabilities in the statements of
financial condition. Under the CECL framework, adjustments to this liability
are recorded as provision for credit losses in the statements of
operations. Unfunded loan commitment balances are evaluated by loan class and
further segregated by revolving and non-revolving
commitments. In order to establish the required level of reserve, the
Company applies average historical utilization rates and ACL loan
model loss rates for each loan class to the outstanding unfunded commitment
balances.
Refer to
Note 4: Loans and Allowance for Credit Losses
for additional information regarding the policies, procedures,
and credit
quality indicators used by the Company.
Prior to the adoption of ASU 2016-13, the Company’s
determination of the allowance took into consideration, among other matters,
periodic review of the ability to collect loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations
that may affect the borrower’s ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
Under the prior incurred loss methodology,
the Company routinely evaluated adversely risk-rated credits for impairment.
Impairment, if any, was typically
measured for each loan by either (i) the present value of the loan’s
expected future cash flows discounted at
the loan’s effective
interest rate, (ii) the loan’s obtainable market
price or (iii) the estimated fair value of the collateral, if the loan was
collateral dependent. General allowances were established for
loans with similar characteristics. In this process, general allowance factors
were based on an analysis of historical loss experience and expected loss given default
derived from the Company’s internal risk
rating
process.
Other adjustments may have been made after assessing internal or external
influences on credit quality that were not fully reflected
in the historical loss or risk rating data. To
the extent that the data supporting such factors had limitations, management’s
judgment and
experience played a key role in determining the allowance estimates.
Premises and Equipment -
With the exception of premises and equipment acquired through business combinations,
which are
initially measured and recorded at fair value, depreciable assets are stated at cost less accumulated
depreciation. Depreciation is charged to
expense using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are capitalized and depreciated
using the straight-line method over the terms of the respective leases or the estimated
useful lives of the improvements, whichever is shorter.
Expected terms include lease option periods to the extent that the exercise of
such options is reasonably assured. The Company generally
assigns depreciable lives of
to
years for buildings and improvements,
to
years for furniture and fixtures and
to
years for
equipment. The Company reviews premises and equipment whenever events or
changes in circumstances indicate that the carrying amount
of the asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future net cash flows expected
to
result from the use of the asset and its eventual disposal is less than its carrying amount.
Restricted Equity Securities -
Restricted equity securities include investments in FHLB Topeka and Bankers’ Bank of Kansas.
FHLB Topeka is a Federal Home Loan Bank and its stock is a required investment for
institutions that are members of the Federal Home
Loan System. The required investment in the common stock is based on a predetermined formula. The
Bankers’ Bank of Kansas is a
correspondent bank located in Wichita, Kansas and the investment is carried at cost and evaluated
for impairment.
Bank-Owned Life Insurance -
The Company has purchased life insurance policies on certain key
employees that are accounted for
under the fair value method. Bank-owned life insurance is recorded at the amount
that can be realized under the insurance contract at the
statement of financial condition date, which is the cash surrender value.
Changes in cash surrender value are recorded in earnings in the
period in which the changes occur.
Foreclosed Assets Held-for-Sale -
Assets acquired through, or in lieu of, loan foreclosure are held-for-sale and
are initially recorded
at fair value less cost to sell at the date of foreclosure, establishing a new cost
basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying amount
or fair value less cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in net income or expenses
from foreclosed assets.
Goodwill and intangible assets, net -
Goodwill is established and recorded if the consideration given during an acquisition
transaction exceeds the fair value of the net assets received. Goodwill has an
indefinite useful life and is not amortized, but is evaluated
annually for potential impairment, or when events or circumstances indicate
that it is more likely than not that the fair value of the reporting
unit is less than its carrying amount. A qualitative assessment is performed to determine whether the existence of events or circumstances led
to a determination that it was more likely than not the fair value was less than the carrying
amount, including goodwill. If, based on the
evaluation, it is determined to be more likely than not that the fair value
was less than the carrying value, then goodwill is tested further for
impairment. If the implied fair value of goodwill is lower than its carrying
amount, a goodwill impairment would be indicated and goodwill
written down
to its implied fair value.
Intangible assets that have finite useful lives, such as core deposit intangibles,
are amortized over their estimated useful lives. The
Company’s core deposit intangible assets represent the value of the anticipated
future cost savings that will result from the acquired core
deposit relationships versus an alternative source of funding. Judgment
may be used in assessing goodwill and intangible assets for
impairment. Estimates of fair value are based on projections of revenues,
operating costs and cash flows of the reporting unit considering
historical and anticipated future results, general economic and market
conditions, as well as the impact of planned business or operational
strategies. The valuations use a combination of present value techniques
to measure fair value considering market factors. Additionally,
judgment is used in determining the useful lives of finite-lived intangible
assets. Adverse changes in the economic environment, operations
of the reporting unit, or changes in judgments and projections could result
in a significantly different estimate of the fair value of the
reporting unit and could result in an impairment of goodwill and/or intangible
assets.
Related Party Transactions - The Company extends credit and receives deposits from related parties. In
management’s opinion, the
loans and deposits were made in the ordinary course of business and made
on similar terms as those prevailing at the time with other persons.
Related party loans totaled $
million and $
million at December 31, 2022 and 2021, respectively. Related party deposits totaled
$
million and $
million at December 31, 2022 and 2021, respectively.
Stock-Based Compensation - The Company accounts for all stock-based compensation
transactions in accordance with Accounting
Standard Codification (“ASC”) 718, Compensation - Stock Compensation,
which requires that stock compensation transactions be
recognized as compensation expense in the consolidated statements of operations
based on their fair values on the measurement date. The
Company recognizes forfeitures as they occur. New shares are issued upon exercise
of an award. The Company records permanent tax
differences through the income tax provision upon vesting or exercise
of a stock-based award. The various stock-based compensation plans
are described more fully in
Note 17: Stock-Based Compensation
.
Transfers of Financial Assets - Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered
when: (i) the assets have been isolated from the Company and put
presumptively beyond the reach of the transferor and its creditors, even
in bankruptcy or other receivership; (ii) the transferee obtains the
right (free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets; and (iii) the
Company does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity or the
ability to unilaterally cause the holder to return specific assets.
Income Taxes - The Company and its subsidiaries file U.S. federal and certain state income tax
returns on a consolidated basis.
Additionally,
the Company and its subsidiaries file separate state income tax returns with various
state jurisdictions. The provision for
income taxes includes the income tax balances of the Company and all of
its subsidiaries.
The Company accounts for income taxes in accordance with ASC 740, Income Taxes. The income tax accounting guidance results
in two components of income tax expense: (i) current; and (ii) deferred. Current
income tax expense reflects taxes to be paid or refunded for
the current period by applying the provisions of the enacted tax law to the taxable income
or excess of deductions over revenues. The
Company determines deferred income taxes using the liability or balance
sheet method. Under this method, the net deferred tax asset or
liability is based on the tax effects of the differences between the book
and tax bases of assets and liabilities and enacted changes in tax rates
and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between
periods. Deferred tax assets are
recognized if it is more likely than not, based on the technical merits, that the tax
position will be realized or sustained upon examination.
The term, more likely than not, means a likelihood of more than 50 percent; the
terms examined and upon examination also include
resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is
initially and subsequently measured as the largest amount of tax benefit
that has a greater than 50 percent likelihood of being realized upon
settlement with a taxing authority that has full knowledge of all relevant information. The determination
of whether or not a tax position has
met the more likely than not recognition threshold considers the facts, circumstances
and information available at the reporting date and is
subject to management’s judgment. Deferred tax assets are reduced by
a valuation allowance if, based on the weight of evidence available, it
is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties on income taxes as a component
of other non-interest expense.
Earnings Per Share -
Basic earnings per share represent net income available to common stockholders divided
by the weighted
average number of common shares outstanding during each period. Diluted earnings
per share reflect additional potential shares that would
have been outstanding if dilutive potential common stock had been
issued, as well as any adjustment to income that would result from the
assumed issuance. Potential common stock that may be issued by the Company
is determined using the treasury stock method.
Derivative Financial Instruments -
The Company records all derivatives on the statement of financial condition
at fair value in
accordance with ASC 815, Derivatives and Hedging. The accounting for changes in the fair value of derivatives depends on
the intended use
of the derivative, whether the Company has elected to designate a derivative
in a hedging relationship and apply hedge accounting and
whether the hedging relationship has satisfied the criteria necessary to apply hedge
accounting. Derivatives designated and qualifying as a
hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest
rate risk, are considered fair value hedges. Derivatives designated and qualifying
as a hedge of the exposure to variability in expected future
cash flows, or other types of forecasted transactions, are considered cash flow
hedges. Hedge accounting generally provides for the matching
of the timing of gain or loss recognition on the hedging instrument with the recognition
of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk in a fair value hedge or the
earnings effect of the hedged forecasted transactions in a cash flow
hedge.
In accordance with the Financial Accounting Standards Board's (“FASB”) fair value measurement guidance in ASU 2011-04, the
Company made an accounting policy election to measure the credit risk
of its derivative financial instruments that are subject to master
netting agreements on a net basis by counter-party portfolio.
Emerging Growth Company (“EGC”) - The Company is currently an EGC. An EGC may take advantage of reduced reporting
requirements and is relieved of certain other significant requirements that are
otherwise generally applicable to public companies. Among the
reductions and reliefs, the Company elected to extend the transition period
for complying with new or revised accounting standards affecting
public companies. This means that the financial statements the Company files or furnishes,
will not be subject to all new or revised
accounting standards generally applicable to public companies for the transition
period for so long as the Company remains an EGC or until
the Company affirmatively and irrevocably opts out of the extended
transition period under the JOBS Act.
Acquisition Activities - The Company accounts for business combinations under the acquisition method of accounting. Assets
acquired and liabilities assumed are measured and recorded at fair value
at the date of acquisition, including identifiable intangible assets. If
the fair value of net assets acquired exceeds the fair value of consideration
paid, a bargain purchase gain is recognized at the date of
acquisition. Conversely, if the consideration paid exceeds the fair
value of the net assets acquired, goodwill is recognized at the acquisition
date. Fair values are subject to refinement for up to a maximum of one year
after the closing date of an acquisition as information relative to
closing date fair values becomes available. Adjustments recorded to the acquired assets and liabilities assumed
are applied prospectively in
accordance with ASC Topic 805. The determination of the fair value of loans acquired takes into account credit quality deterioration
and
probability of loss; therefore, the related ACL is not carried forward at the time of acquisition. Identifiable intangible assets are recognized
separately if they arise from contractual or other legal rights or if they are separable
(i.e., capable of being sold, transferred, licensed, rented,
or exchanged separately from the entity). Deposit liabilities and the
related depositor relationship intangible assets, known as the core deposit
intangible assets, may be exchanged in observable exchange transactions. As a result, the core deposit intangible asset is considered
identifiable, because the separability criterion has been met.
Treasury Stock - When the Company acquires treasury stock, the sum of the consideration
paid and direct transaction costs after tax
is recognized as a deduction from equity. The cost basis for the reissuance of treasury
stock is determined
using a first-in, first-out basis. To
the extent that the reissuance price is more than the cost basis (gain), the excess is recorded
as an increase to additional paid-in capital in the
consolidated statements of financial condition. If the reissuance price
is less than the cost basis (loss), the difference is recorded to additional
paid-in capital to the extent there is a cumulative treasury stock paid-in capital
balance. Any loss in excess of the cumulative treasury stock
paid-in capital balance is charged to retained earnings.
Operating Segments - An operating segment is a component of an entity that has separate financial information related
to its
business activities and is reviewed by the chief operating decision maker
on a regular basis to allocate resources and assess performance. The
Company identifies the following markets as operating segments: (i) Kansas City, Missouri
and Leawood, Kansas; (ii) Wichita, Kansas; (iii)
Oklahoma City, Oklahoma; (iv) Tulsa, Oklahoma; (v) Energy; (vi) Dallas and Frisco, Texas; (vii) Phoenix, Arizona; (viii) Franchise Finance;
(ix) Financial Institutions; (x) Colorado Springs, Colorado; (xi) Denver,
Colorado; (xii) New Mexico; (xiii) Small Business Administration
(“SBA”); (xiv) Residential Mortgage; and (xv) Sponsor Finance. These markets
provide similar products and services using a similar process
to a similar customer base. Our products and services include, but are not limited
to, loans; checking and savings accounts; time deposits and
credit cards. Loan products include commercial, real estate, consumer, and
SBA loans. The regulatory environment is the same for the
markets as well. The chief operating decision maker monitors the revenue and
costs of the markets; however, operations are managed,
including allocation of resources, and financial performance is evaluated
on a Company-wide basis. As a result, the markets are aggregated
into
one
reportable segment.
Recent Accounting Pronouncements
The following ASUs represent changes to current accounting guidance that will be adopted in future years:
ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled
Debt Restructurings and Vintage Disclosures
Background
- ASU 2022-02 provides new guidance on (i) troubled debt restructurings (“TDRs”) and (ii) vintage disclosures
for
gross write-offs. The update eliminates the accounting guidance for TDRs and requires a company to
determine if a modification
results in a new loan or a continuation of an existing loan. The update enhances
the required disclosures for certain modifications
made to borrowers experiencing financial difficulty. In addition, the update
requires disclosure of current-period gross charge-offs
by year of origination for financing receivables. For the Company, the
amendments are effective as of January 1, 2023.
Impact of adoption
- The Company expects to adopt the provisions of this guidance as of January 1, 2023. We have concluded
that
the adoption of this ASU will have an immaterial impact on our consolidated financial statements and related disclosures
.
The following ASUs represent changes to current accounting guidance that were adopted in the current year:
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments:
Background
- ASU 2016-13 and its subsequent amendments provide new guidance on the impairment model for financial assets
measured at amortized cost, including loans held-for-investment and
off-balance sheet credit exposures. The CECL model requires
an estimate of expected credit losses, measured over the contractual life
of an instrument, that considers forecasts of future
economic conditions in addition to information about past events and current
conditions. ASU 2016-13 requires new disclosures,
including the use of vintage analysis on the Company’s credit quality indicators.
In addition, ASU 2016-13 removes the AFS
securities other-than-temporary-impairment model that reduced the
cost basis of the investment and is replaced with an impairment
model that will recognize an allowance for credit losses on available-for-sale securities.
Impact of adoption
- The Company adopted ASU 2016-13 on January 1, 2022 using the modified retrospective approach. All
disclosures as of December 31, 2022 are presented in accordance with Topic 326. The Company
did not recast comparative financial
periods and has presented those disclosures under previously applicable GAAP. The Company
used the prospective transition
approach for AFS securities for which other-than-temporary-impairment has been recognized prior to January
1, 2022. As a result,
the amortized cost basis remains the same before and after the effective date of ASU 2016-13.
The following table illustrates the impact of adopting ASU 2016-13 and details how outstanding loan balances have been
reclassified because of changes made to the Company’s loan segments under
CECL:
January 1, 2022
As Reported under ASU
2016-13
Pre-ASU 2016-13
Impact of ASU 2016-13
Adoption
(Dollars in thousands)
Assets:
Loans (outstanding balance)
Commercial and industrial
$
843,024
$
1,401,681
$
(558,657)
Commercial and industrial lines of credit
617,398
-
617,398
Energy
278,579
278,860
(281)
Commercial real estate
1,278,479
1,281,095
(2,616)
Construction and land development
574,852
578,758
(3,906)
Residential real estate
360,046
600,816
(240,770)
Multifamily real estate
240,230
-
240,230
PPP
-
64,805
(64,805)
Consumer
63,605
63,605
-
Gross Loans
4,256,213
4,269,620
(13,407)
Net deferred loan fees and costs
-
13,407
(13,407)
Allowance for credit losses on loans
56,628
58,375
(1,747)
Loans, net of the allowance for credit losses
4,199,585
4,197,838
1,747
Deferred tax asset
$
15,301
$
14,474
$
Liabilities
Allowance for credit losses on off-balance sheet
exposures
$
5,184
$
-
$
5,184
Stockholders' equity
Retained earnings
$
144,489
$
147,099
$
(2,610)
In connection with adoption of ASU 2016-13, changes were made to the Company’s loan segments to align with the methodology
applied in determining the allowance under CECL. The commercial and industrial loan portfolio
was separated into term loans and
lines of credit. In addition, the remaining Paycheck Protection Program
(“PPP”) loans were consolidated into the commercial and
industrial term loan segment due to their declining outstanding balance. The Company
also separated the residential and multifamily
real estate loan segments. Refer to
Note 4: Loans and Allowance for Credit Losses
for detail on the loan segments.
ASU 2016-02, Leases (Topic 842):
Background
- In February 2016, the FASB issued ASU 2016-02, Leases. The guidance in ASU 2016-02 supersedes the lease
recognition requirements in ASC Topic 840, Leases. The new standard established a right-of-use (“ROU”) model that requires a
lessee to record a ROU asset and lease liability on the statement of financial
condition for all leases with terms longer than 12
months. Leases are classified as either finance or operating, with classification
affecting the pattern of expense recognition in the
consolidated statements
of operations.
Impact of Adoption
- The Company adopted ASU 2016-02 on January 1, 2022. In July 2018, the FASB issued ASU 2018-11
which, among other things, provided an additional transition method
that allows entities to not apply the guidance in ASU 2016-02
in the comparative periods presented in the financial statements and instead
recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. The Company did not recast comparative
financial periods and has presented
those disclosures under previously applicable GAAP.
We also elected to apply certain practical expedients provided under ASU
2016-02 whereby we combine lease and non-lease components and we will not
reassess (i) whether any expired or existing
contracts are or contain leases, (ii) the lease classification for any expired or existing
leases and (iii) initial direct costs for any
existing leases. We also did not apply the recognition requirements of ASU 2016-02 to any short-term leases (as defined by related
accounting guidance).
The following table illustrates the impact of adopting ASU 2016-02 on the Company’s financial statements:
January 1, 2022
As Reported under ASU
2016-02
Pre-ASU 2016-02
Impact of ASU 2016-02
Adoption
(Dollars in thousands)
Assets:
Right-of-use asset
$
23,589
$
-
$
23,589
Liabilities:
Lease incentive
-
2,125
(2,125)
Accrued rent payable
-
(904)
Lease liability
$
26,618
$
-
$
26,618
Note 2:
Acquisition Activities
On November 22, 2022, the Company completed its acquisition of Central
whereupon Central was merged with and into the Bank.
Pursuant to the merger agreement executed in June 2022, the Company paid $
66.2
million of cash consideration and assumed all of the assets
and liabilities of Central by operation of law. The acquisition added three full-service
branches within Colorado and New Mexico to the
Company’s footprint,
adds experienced leaders, in particular in the SBA and Residential Mortgage lending areas, and accelerates our growth
strategy.
Central acquisition-related costs totaled $
8.3
million for the year ended December 31, 2022, including a Day 1 CECL provision
expense of $
4.4
million, which were included in the Company’s consolidated statements of operations. The
results of Central are included in
the results of the Company subsequent to the acquisition date and reported
in this annual report on Form 10-K.
The Company determined that the acquisition of Central constitutes a business combination
as defined in ASC Topic 805, Business
Combinations. Accordingly, as of the date of the acquisition, the Company recorded the assets acquired and
liabilities assumed at fair value.
The Company determined fair values in accordance with the guidance
provided in ASC Topic 820, Fair Value Measurements and
Disclosures. In many cases, the determination of these fair values required
management to make estimates about discount rates, future
expected cash flows, market conditions and other future events that are highly
subjective in nature and subject to change. Actual results could
differ materially. The Company has made the determination of fair values using
the best information available at the time; however, purchase
accounting is not complete and the assumptions used are subject to change and, if changed,
could have a material effect on the Company's
financial position and results of operations.
The table below summarizes preliminary net assets acquired (at fair value)
and consideration transferred in connection with the
Central acquisition:
November 22, 2022
(Dollars in thousands)
Assets:
Cash and cash equivalents
$
191,916
Available-for-sale securities
41,103
Loans, net of unearned fees
388,531
Premises and equipment
2,270
Restricted equity securities
1,087
Interest receivable
2,514
Foreclosed assets held for sale
Core deposit intangible
16,465
Other
4,231
Total assets acquired
648,275
Liabilities:
Total deposits
570,275
Federal Home Loan Bank advances
10,559
Other borrowings
10,901
Interest payable and other liabilities
3,209
Total liabilities assumed
594,944
Identifiable net assets acquired
$
53,331
Consideration:
Cash
66,167
Goodwill
$
12,836
In connection with the Central acquisition, the Company recorded $
12.8
million of goodwill, which is deductible for tax purposes.
The amount of goodwill recorded reflects the expanded market presence,
synergies and operational efficiencies that are expected to result
from the acquisition. The following is a description of the methods used to determine
the fair values of significant assets and liabilities
presented above:
Cash and cash equivalents
-The carrying amount of these assets was deemed a reasonable estimate of fair
value based on the short-
term nature of these assets.
Loans, net
-The fair value of loans was based on a discounted cash flow methodology.
Inputs and assumptions used in the fair
value estimate of the loan portfolio, includes interest rate, servicing, credit and liquidity
risk, and required equity return. The fair value of
loans was calculated using a discounted cash flow analysis based on the remaining
maturity and repricing terms. Cash flows were adjusted
by estimating future credit losses and the rate of prepayments. Projected monthly
cash flows were then discounted to present value using a
risk-adjusted market rate for similar loans.
Core deposit intangibles
-The Company identified customer relationships, in the form of core deposit intangibles,
as an identified
intangible asset. Core deposit intangibles derive value from
the expected future benefits or earnings capacity attributable to the acquired core
deposits. The core deposit intangible was valued by identifying the expected future
benefits of the core deposits and discounting those
benefits back to present value. The core deposit intangible will be amortized over
its estimated useful life of approximately
years using
the sum of the years digits accelerated method.
Deposits
-By definition, the fair value of demand and saving deposits equals the
amount payable. For time deposits acquired, the
Company utilized an income approach, discounting the contractual cash flows
on the instruments over their remaining contractual lives at
prevailing market rates.
FHLB Advances
- FHLB advances are recorded at their fair value as estimated by discounting the contractual future cash flows using
FHLB rates offered on similar maturities as of the acquisition date.
The fair value of the acquired assets and liabilities noted in the table may change during
the provisional period, which may last up to
twelve months subsequent to the acquisition date. The Company may obtain additional
information to refine the valuation of the acquired
assets and liabilities and adjust the recorded fair value.
Accounting for acquired loans
Loans acquired are recorded at fair value with no carryover of the related allowance
for credit losses. Purchased-credit deteriorated
loans (“PCD”) are loans that have experienced more than insignificant
credit deterioration since origination and are recorded at the purchase
price. Management determined that any loans which were past due, adversely risk
rated, on non-accrual or considered a troubled debt
restructured loan were PCD loans. The allowance for credit losses is determined on a collective
basis and is allocated to the individual loans.
The sum of the loan’s purchase price and the allowance for credit losses becomes its initial
amortized cost basis. The difference between the
initial amortized cost basis and the par value of the loan is a noncredit discount
or premium, which is amortized into interest income over the
life of the loan.
Non-PCD loans have not experienced a more than insignificant deterioration
in credit quality since origination. The difference
between the fair value and outstanding balance of the non-PCD loans is recognized
as an adjustment to interest income over the lives of the
loan.
A Day 1 CECL allowance for credit losses on the non-PCD loans was recorded through provision for credit loss expense within the
consolidated statements of operations. At the date of acquisition, of the $
388.5
million of loans acquired from Central, $
20.5
million, or
%
of Central’s loan portfolio, were accounted for as PCD loans.
The following table provides a summary of PCD loans purchased as part
of the Central acquisition as of the acquisition date:
Total
(Dollars in thousands)
Unpaid principal balance
$
22,005
PCD allowance for credit loss at acquisition
(916)
(Discount) premium on acquired loans
(566)
Purchase price of PCD loans
$
20,523
Pro forma information
The following table presents unaudited pro-forma information as if the acquisition
of Central had occurred on January 1, 2021.
This
pro forma information gives effect to certain adjustments, including
purchase accounting fair value adjustments, amortization of core deposit
intangible and related income tax effects and is based on our historical results for the
periods presented. The Day 1 CECL provision of $
4.4
million is included in the 2021 pro forma results. Transaction-related costs related to
each acquisition are not reflected in the pro forma
amounts. The pro forma information does not necessarily reflect the results of operations
that would have occurred had the Company
acquired Central at the beginning of fiscal year 2021. Cost savings are also
not reflected in the unaudited pro forma amounts.
The pro forma information is theoretical in nature and not necessarily indicative of
future consolidated results of operations of the
Company or the consolidated results of operations which would have resulted
had the Company acquired Central during the periods
presented.
Pro forma for Years Ended December 31,
Actual from
Acquisition Date
through
December 31, 2022
(Dollars in thousands, except share and per share data)
Net interest income
$
1,906
$
209,957
$
186,824
Non-interest income
26,193
23,225
Net income
68,846
71,689
Pro-forma earnings per share:
Basic
$
1.39
$
1.40
Diluted
1.38
1.38
Weighted average shares outstanding:
49,489,860
51,291,428
Basic
50,002,054
52,030,582
Diluted
Note 3:
Securities
Available-for-Sale Securities
The amortized cost and approximate fair values, together with gross unrealized
gains and losses, of period end available-for-sale
securities consisted of the following:
December 31, 2022
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Mortgage-backed - GSE residential
$
197,243
$
$
25,166
$
172,309
Collateralized mortgage obligations - GSE residential
11,629
-
10,886
State and political subdivisions
551,007
57,440
494,496
Corporate bonds
9,762
-
9,210
Total available-for-sale securities
$
769,641
$
1,161
$
83,901
$
686,901
December 31, 2021
Amortized Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Mortgage-backed - GSE residential
$
161,675
$
1,809
$
1,774
$
161,710
Collateralized mortgage obligations - GSE residential
18,130
18,431
State and political subdivisions
532,906
29,329
561,468
Corporate bonds
4,241
-
4,360
Total available-for-sale securities
$
716,952
$
31,568
$
2,551
$
745,969
The carrying value of securities pledged as collateral was $
million and $
at December 31, 2022 and 2021, respectively.
The following table summarizes the gross realized gains and losses from sales or maturities
of AFS securities:
For the Year Ended December 31, 2022
Gross Realized Gains
Gross Realized Losses
Net Realized Gain
(Dollars in thousands)
Available-for-sale securities
$
$
$
For the Year Ended December 31, 2021
Gross Realized Gains
(1)
Gross Realized Losses
Net Realized Gain
(Dollars in thousands)
Available-for-sale securities
$
1,157
$
$
1,023
(1)
Included $
thousand related to a previously disclosed OTTI municipal security that was settled in 2020.
The following table shows available-for-sale securities gross unrealized losses, the
number of securities that are in an unrealized
loss position, and fair value of the Company’s investments with unrealized
losses, aggregated by investment class and length of time that
individual securities have been in a continuous unrealized loss position at
December 31, 2022 and 2021:
December 31, 2022
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Number
of Securities
Fair
Value
Unrealized
Losses
Number
of Securities
Fair
Value
Unrealized
Losses
Number
of Securities
(Dollars in thousands)
Available-for-Sale Securities
Mortgage-backed - GSE residential
$
91,929
$
10,410
$
66,036
$
14,756
$
157,965
$
25,166
Collateralized mortgage obligations -
GSE residential
10,636
10,887
State and political subdivisions
350,884
36,697
52,519
20,743
403,403
57,440
Corporate bonds
9,210
-
-
-
9,210
Total temporarily impaired AFS
securities
$
462,659
$
48,392
$
118,806
$
35,509
$
581,465
$
83,901
December 31, 2021
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Losses
Number
of
Securities
Fair
Value
Unrealized
Losses
Number
of
Securities
Fair
Value
Unrealized
Losses
Number
of
Securities
(Dollars in thousands)
Available-for-Sale Securities
Mortgage-backed - GSE residential
$
87,306
$
1,774
$
-
$
-
-
$
87,306
$
1,774
Collateralized mortgage obligations -
GSE residential
-
-
-
State and political subdivisions
72,915
1,310
74,225
Corporate bonds
-
-
-
-
-
-
-
-
-
Total temporarily impaired AFS
securities
$
161,024
$
2,546
$
1,310
$
$
162,334
$
2,551
Management evaluated all of the available-for-sale securities in an unrealized
loss position at December 31, 2022.
The unrealized
losses in the Company’s investment portfolio were caused by interest rate changes. The Company
does not intend to sell the investments and
it is not more likely than not the Company will be required to sell the investments before recovery
of their amortized cost basis. The
Company recorded no credit loss impairment in 2022 and no other than temporary
impairment losses on AFS securities in 2021.
The amortized cost, fair value, and weighted average yield of available-for-sale
securities by contractual maturity, are shown below:
December 31, 2022
Within
After One to
After Five to
After
One Year
Five Years
Ten Years
Ten Years
Total
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
(1)
Amortized cost
$
-
$
$
$
197,120
$
197,243
Estimated fair value
$
-
$
$
$
172,191
$
172,309
Weighted average yield
(2)
-
%
4.77
%
4.05
%
2.39
%
2.39
%
Collateralized mortgage obligations - GSE residential
(1)
Amortized cost
$
-
$
-
$
2,344
$
9,285
$
11,629
Estimated fair value
$
-
$
-
$
2,229
$
8,657
$
10,886
Weighted average yield
(2)
-
%
-
%
2.77
%
2.25
%
2.36
%
State and political subdivisions
Amortized cost
$
1,076
$
6,310
$
109,771
$
433,850
$
551,007
Estimated fair value
$
1,077
$
6,471
$
109,134
$
377,814
$
494,496
Weighted average yield
(2)
3.54
%
4.60
%
3.08
%
2.70
%
2.80
%
Corporate bonds
Amortized cost
$
-
$
$
9,612
$
-
$
9,762
Estimated fair value
$
-
$
$
9,064
$
-
$
9,210
Weighted average yield
(2)
-
%
5.43
%
5.70
%
-
%
5.70
%
Total available-for-sale securities
Amortized cost
$
1,076
$
6,478
$
121,832
$
640,255
$
769,641
Estimated fair value
$
1,077
$
6,634
$
120,528
$
558,662
$
686,901
Weighted average yield
(2)
3.54
%
4.62
%
3.28
%
2.60
%
2.74
%
(1)
Actual maturities may differ from contractual maturities
because issuers may have the rights to call or prepay obligations
with or without prepayment penalties.
(2)
Yields are calculated based on amortized cost using a
30/360 day basis. Tax-exempt securities are not tax effected.
December 31, 2021
Within
After One to
After Five to
After
One Year
Five Years
Ten Years
Ten Years
Total
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
(1)
Amortized cost
$
-
$
$
$
161,497
$
161,675
Estimated fair value
$
-
$
$
$
161,523
$
161,710
Weighted average yield
(2)
-
%
4.67
%
4.00
%
1.62
%
1.62
%
Collateralized mortgage obligations - GSE residential
(1)
Amortized cost
$
-
$
-
$
2,421
$
15,709
$
18,130
Estimated fair value
$
-
$
-
$
2,559
$
15,872
$
18,431
Weighted average yield
(2)
-
%
-
%
2.77
%
1.61
%
1.77
%
State and political subdivisions
Amortized cost
$
$
4,304
$
84,230
$
443,631
$
532,906
Estimated fair value
$
$
4,520
$
90,645
$
465,557
$
561,468
Weighted average yield
(2)
3.49
%
4.14
%
3.29
%
2.67
%
2.78
%
Corporate bonds
Amortized cost
$
-
$
$
3,637
$
-
$
4,241
Estimated fair value
$
-
$
$
3,690
$
-
$
4,360
Weighted average yield
(2)
-
%
5.83
%
4.28
%
-
%
4.50
%
Total available-for-sale securities
Amortized cost
$
$
4,938
$
90,436
$
620,837
$
716,952
Estimated fair value
$
$
5,221
$
97,050
$
642,952
$
745,969
Weighted average yield
(2)
3.49
%
4.35
%
3.32
%
2.37
%
2.50
%
(1)
Actual maturities may differ from contractual maturities
because issuers may have the rights to call or prepay obligations
with or without prepayment penalties.
(2)
Yields are calculated based on amortized cost using a
30/360 day basis. Tax-exempt securities are not tax effected.
Equity Securities
Equity securities consist of $
2.9
million of private equity investments. Equity securities are included in other assets on the
consolidated statements of financial condition.
During 2020, the Company acquired an $
million privately-held security in partial satisfaction of debts previously contracted. The
Company used a discounted cash flow model, a market transactions model and
a public valuation approach to determine the security’s cost
basis. The Company elected a measurement alternative that allows the security to remain
at cost until an impairment is identified or an
observable price change for an identical or similar investment of the
same issuer occurs. Impairment is recorded when there is evidence that
the expected fair value of the investment has declined to below the recorded
cost. No changes to the cost basis occurred in 2020. During
2021, the Company sold the equity security for $
million that resulted in a $
million realized loss.
The following is a summary of the recorded fair value and the unrealized and
realized gains and losses recognized in net income on
equity securities:
For the Year Ended December 31,
(Dollars in thousands)
Net (losses) gains recognized during the reporting period on equity securities
$
(181)
$
(6,325)
$
Less: net losses recognized during the period on equity securities sold during
the
period
(181)
(6,245)
-
Unrealized (loss) gain recognized during the reporting period on
equity securities
still held at the reporting date
$
-
$
(80)
$
Note 4:
Loans and Allowance for Credit Losses
Categories of loans at December 31, 2022 and 2021 include:
As of December 31,
Amount
% of Loans
Amount
% of Loans
(Dollars in thousands)
Commercial and industrial
$
1,017,678
%
$
843,024
%
Commercial and industrial lines of credit
957,254
617,398
Energy
173,218
278,579
Commercial real estate
1,718,947
1,278,479
Construction and land development
794,788
574,852
Residential real estate
409,124
360,046
Multifamily real estate
237,984
240,230
Consumer
63,736
63,605
Loans, net of unearned fees
5,372,729
%
4,256,213
%
Less: Allowance for credit losses on loans
(1)
(61,775)
(58,375)
Loans, net of the allowance for credit losses on loans
$
5,310,954
$
4,197,838
(1)
As of December 31, 2021, this line represents the allowance for
loan and lease losses. See further discussion in
Note 1: Nature of
Operations and Summary of Significant Accounting Policies
.
Accrued interest of $
million and $
million at December 31, 2022 and December 31, 2021, respectively,
presented in “interest
receivable” on the consolidated statements of financial condition
is excluded from the amortized cost basis disclosed in the above table.
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
percent guaranteed by the SBA and repayment is primarily dependent on the
borrower’s cash flow or SBA repayment approval.
●
Commercial and Industrial Lines of Credit
- The category includes lines of credit to commercial and industrial
customers for working capital needs. The loan terms typically require interest-only
payments, mature in one year, and
require the full balance paid-off at maturity. Lines of credit allow the borrower
to drawdown and repay the line of credit
based on the customer’s cash flow needs. Repayment is primarily from the operating
cash flow of the business. Credit risk
is driven by creditworthiness of a borrower and the economic conditions that
impact the cash flow stability from business
operations.
●
Energy
- The category includes loans to oil and natural gas customers for use in financing working
capital needs,
exploration and production activities, and acquisitions. The loans are repaid primarily
from the conversion of crude oil and
natural gas to cash. Credit risk is driven by creditworthiness of a borrower and
the economic conditions that impact the
cash flow stability from business operations. Energy loans are typically collateralized
with the underlying oil and gas
reserves.
●
Commercial Real Estate
- The category includes loans that typically involve larger principal amounts and repayment of
these loans is generally dependent on the successful operations of the property
securing the loan or the business conducted
on the property securing the loan. These are viewed primarily as cash flow loans and secondarily
as loans secured by real
estate. Credit risk may be impacted by the creditworthiness of a borrower,
property values and the local economies in the
borrower’s market areas.
●
Construction and Land Development
- The category includes loans that are usually based upon estimates of costs and
estimated value of the completed project and include independent appraisal reviews
and a financial analysis of the
developers and property owners. Sources of repayment include permanent
loans, sales of developed property or an interim
loan commitment from the Company until permanent financing is obtained. These loans
are higher risk than other real
estate loans due to their ultimate repayment being sensitive to interest rate
changes, general economic conditions, and the
availability of long-term financing. Credit risk may be impacted by
the creditworthiness of a borrower, property values and
the local economies in the borrower’s market areas.
●
Residential Real Estate
- The category includes loans that are generally secured by owner-occupied
1-4 family residences.
Repayment of these loans is primarily dependent on the personal income and
credit rating of the borrowers. Credit risk in
these loans can be impacted by economic conditions within or outside
the borrower’s market areas that might impact either
property values or a borrower’s personal income.
●
Multifamily Real Estate -
The category includes loans that are generally secured by multifamily properties.
Repayment of
these loans is primarily dependent on occupancy rates and the personal income of
the tenants. Credit risk in these loans can
be impacted by economic conditions within or outside the borrower’s
market areas that might impact either property values
or the tenants’ personal income.
●
Consumer
- The category includes revolving lines of credit and various term loans such as automobile
loans and loans for
other personal purposes. Repayment is primarily dependent on the personal
income and credit rating of the borrowers.
Credit risk is driven by consumer economic factors (such as unemployment
and general economic conditions in the
borrower’s market area) and the creditworthiness of a borrower.
Allowance for Credit Losses
The Company established a CECL committee that meets at least quarterly to oversee the ACL methodology. The committee
estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions, and
reasonable and supportable forecasts. The ACL represents the Company’s current estimate of lifetime credit losses inherent in the loan
portfolio at the statement of financial condition date. The ACL is adjusted for expected prepayments when appropriate and excludes expected
extensions, renewals, and modifications.
The ACL is the sum of three components: (i) asset specific / individual loan reserves; (ii) quantitative (formulaic or pooled)
reserves; and (iii) qualitative (judgmental) reserves.
Asset Specific -
When unique qualities cause a loan’s exposure to loss to be inconsistent with the
pool segments, the loan is
individually evaluated. Individual reserves are calculated for loans
that are risk-rated substandard and on non-accrual and loans that are risk-
rated doubtful or loss that are greater than a defined dollar threshold. In
addition, TDRs are also individually evaluated. Reserves on asset
specific loans may be based on collateral, for collateral-dependent loans, or on
quantitative and qualitative factors, including expected cash
flow, market sentiment, and guarantor support.
Quantitative
- The Company used the cohort method, which identifies and captures the balance of a pool of loans with similar
risk
characteristics as of a particular time to form a cohort. For example, the outstanding
commercial and industrial loans and commercial and
industrial lines of credit loan segments as of quarter-end are considered
cohorts. The cohort is then tracked for losses over the remaining life
of loans or until the pool is exhausted. The Company used a lookback period of approximately
six-years to establish the cohort population.
By using the historical data timeframe, the Company can establish a historical loss factor
for each of its loan segments and adjust the losses
with qualitative and forecast factors
Qualitative
- The Company uses qualitative factors to adjust the historical loss factors for current conditions. The Company
primarily uses the following qualitative factors:
◾
The nature and volume of changes in risk ratings;
◾
The volume and severity of past due loans;
◾
The volume of non-accrual loans;
◾
The nature and volume of the loan portfolio, including the existence, growth, and
effect of any concentrations of credit;
◾
Changes in the Institute of Supply Management’s Purchasing Manager Indices
(“PMI”) for services and manufacturing;
◾
Changes in collateral values;
◾
Changes in lending policies, procedures, and quality of loan reviews;
◾
Changes in lending staff; and
◾
Changes in competition, legal and regulatory environments
In addition to the current condition qualitative adjustments, the Company uses the
Federal Reserve’s unemployment forecast to
adjust the ACL based on forward looking guidance. The Federal Reserve’s unemployment forecast extends three-years and is eventually
reverted to the mean of six percent by year 10.
Internal Credit Risk Ratings
The Company uses a weighted average risk rating factor to adjust the historical
loss factors for current events. Risk ratings
incorporate the criteria utilized by regulatory authorities to describe criticized
assets, but separate various levels of risk concentrated within
the regulatory “Pass” category. Risk ratings are established for loans at origination
and are monitored on an ongoing basis. The rating
assigned to a loan reflects the risks posed by the borrower’s expected performance
and the transaction’s structure. Performance metrics used
to determine a risk rating include, but are not limited to, cash flow adequacy,
liquidity, and collateral. A description of the loan risk ratings
follows:
Loan Grades
•
Pass (risk rating 1-4)
- Considered satisfactory. Includes borrowers that generally maintain good liquidity
and financial
condition or the credit is currently protected with sales trends remaining flat
or declining. Most ratios compare favorably with
industry norms and Company policies. Debt is programmed and timely
repayment is expected.
•
Special Mention (risk rating 5)
- Borrowers generally exhibit adverse trends in operations or an imbalanced position
in their
balance sheet that has not reached a point where repayment is jeopardized.
Credits are currently protected but, if left
uncorrected, the potential weaknesses may result in deterioration of
the repayment prospects for the credit or in the Company’s
credit or lien position at a future date. These credits are not adversely classified and do not expose
the Company to enough risk
to warrant adverse classification.
•
Substandard (risk rating 6)
- Credits generally exhibit well-defined weakness(es) that jeopardize repayment.
Credits are
inadequately protected by the current worth and paying capacity of
the obligor or of the collateral pledged. A distinct possibility
exists that the Company will sustain some loss if deficiencies are not corrected.
Loss potential, while existing in the aggregate
amount of substandard assets, does not have to exist in individual assets classified substandard.
Substandard loans include both
performing and non-performing loans and are broken out in the table below.
•
Doubtful (risk rating 7)
- Credits which exhibit weaknesses inherent in a substandard credit with the added
characteristic that
these weaknesses make collection or liquidation in full highly questionable or
improbable based on existing facts, conditions
and values. Because of reasonably specific pending factors, which may
work to the advantage and strengthening of the assets,
classification as a loss is deferred until its more exact status may be determined.
•
Loss (risk rating 8)
- Credits which are considered uncollectible or of such little value that their continuance
as a bankable
asset is not warranted.
The following tables present the credit risk profile of the Company’s loan portfolio
based on an internal rating category and loan
segments:
As of December 31, 2022
Amortized Cost Basis by Origination Year
and Internal Risk Rating
Amortized Cost Basis
LOC
LOC to
Term
Total
(Dollars in thousands)
Commercial and industrial
Pass
$
465,963
$
281,166
$
55,934
$
50,445
$
48,595
$
20,648
$
-
$
19,089
$
941,840
Special mention
2,531
23,055
14,573
2,951
4,947
-
48,184
Substandard - accrual
1,647
1,330
-
21,166
26,149
Substandard - non-accrual
-
-
1,383
-
-
-
1,493
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
Total
$
468,784
$
305,002
$
72,154
$
54,732
$
55,665
$
21,045
$
-
$
40,296
$
1,017,678
Commercial and industrial lines of credit
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
890,109
$
-
$
890,109
Special mention
-
-
-
-
-
-
49,861
-
49,861
Substandard - accrual
-
-
-
-
-
-
10,805
-
10,805
Substandard - non-accrual
-
-
-
-
-
-
6,479
-
6,479
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
-
$
-
$
-
$
-
$
-
$
-
$
957,254
$
-
$
957,254
Energy
Pass
$
7,585
$
$
$
-
$
-
$
-
$
162,834
$
$
171,124
Special mention
-
-
-
-
-
-
-
-
-
Substandard - accrual
-
-
-
-
-
-
1,476
-
1,476
Substandard - non-accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
7,585
$
$
$
-
$
-
$
-
$
164,928
$
$
173,218
Commercial real estate
Pass
$
474,901
$
276,403
$
156,553
$
119,643
$
73,989
$
84,460
$
350,732
$
108,837
$
1,645,518
Special mention
23,223
6,603
1,330
6,558
4,339
2,429
12,285
57,333
Substandard - accrual
10,388
-
1,548
-
13,617
Substandard - non-accrual
-
2,479
-
-
-
-
-
-
2,479
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
508,512
$
285,485
$
157,666
$
121,055
$
80,607
$
90,347
$
353,161
$
122,114
$
1,718,947
Construction and land development
Pass
$
346,429
$
266,557
$
93,229
$
19,866
$
1,497
$
9,053
$
49,500
$
-
$
786,131
Special mention
-
7,727
-
-
-
-
-
-
7,727
Substandard - accrual
-
-
-
-
-
Substandard - non-accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
346,586
$
274,594
$
93,692
$
19,866
$
1,497
$
9,053
$
49,500
$
-
$
794,788
Residential real estate
Pass
$
77,416
$
84,158
$
121,078
$
45,265
$
37,395
$
34,852
$
1,649
$
-
$
401,813
Special mention
3,272
-
-
-
-
3,938
Substandard - accrual
-
3,148
-
-
-
-
-
3,182
Substandard - non-accrual
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
77,703
$
87,430
$
124,413
$
45,491
$
37,395
$
34,852
$
1,649
$
$
409,124
Multifamily real estate
Pass
$
85,785
$
26,705
$
6,915
$
11,938
$
2,491
$
$
86,879
$
16,509
$
237,948
Special mention
-
-
-
-
-
-
-
Substandard - accrual
-
-
-
-
-
-
-
-
-
Substandard - non-accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
85,785
$
26,705
$
6,915
$
11,938
$
2,491
$
$
86,879
$
16,545
$
237,984
Consumer
Pass
$
7,917
$
1,347
$
2,611
$
$
$
$
51,416
$
-
$
63,691
Special mention
-
-
-
-
-
-
-
Substandard - accrual
-
-
-
-
-
-
Substandard - non-accrual
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
7,917
$
1,347
$
2,643
$
$
$
$
51,416
$
-
$
63,736
Total
Pass
$
1,465,996
$
936,642
$
436,548
$
247,422
$
164,096
$
149,745
$
1,593,119
$
144,606
$
5,138,174
Special mention
26,007
40,657
15,326
4,507
11,513
4,425
52,290
12,362
167,087
Substandard - accrual
10,869
5,837
1,412
1,847
12,281
22,158
56,196
Substandard - non-accrual
-
2,583
-
1,383
-
6,479
10,642
Doubtful
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
Total
$
1,502,872
$
980,869
$
457,711
$
253,347
$
177,797
$
156,029
$
1,664,787
$
179,317
$
5,372,729
The following tables present the Company’s loan portfolio aging analysis of
the recorded investment in loans as of December 31,
2022:
As of December 31, 2022
Amortized Cost Basis by Origination Year
and Past Due Status
Amortized Cost Basis
2017 and Prior
Revolving loans
Revolving loans
converted to
term loans
Total
(Dollars in thousands)
Commercial and industrial
30-59 days
$
$
4,784
$
-
$
-
$
-
$
1,049
$
-
$
-
$
5,853
60-89 days
-
-
-
-
-
-
Greater than 90 days
-
1,383
-
-
1,551
Total past due
4,982
1,383
1,061
-
7,889
Current
468,764
300,020
72,147
54,726
54,282
19,984
-
39,866
1,009,789
Total
$
468,784
$
305,002
$
72,154
$
54,732
$
55,665
$
21,045
$
-
$
40,296
$
1,017,678
Greater than 90 days and
accruing
$
-
$
$
$
-
$
-
$
-
$
-
$
-
$
Commercial and industrial
lines of credit
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
2,814
$
-
$
2,814
60-89 days
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
7,063
-
7,063
Total past due
-
-
-
-
-
-
10,857
-
10,857
Current
-
-
-
-
-
-
946,397
-
946,397
Total
$
-
$
-
$
-
$
-
$
-
$
-
$
957,254
$
-
$
957,254
Greater than 90 days and
accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
$
-
$
Energy
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
Total past due
-
-
-
-
-
-
-
Current
7,585
-
-
-
164,310
172,600
Total
$
7,585
$
$
$
-
$
-
$
-
$
164,928
$
$
173,218
Greater than 90 days and
accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Commercial real estate
30-59 days
$
-
$
-
$
-
$
1,180
$
-
$
-
$
-
$
-
$
1,180
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
-
1,180
-
-
-
-
1,180
Current
508,512
285,485
157,666
119,875
80,607
90,347
353,161
122,114
1,717,767
Total
$
508,512
$
285,485
$
157,666
$
121,055
$
80,607
$
90,347
$
353,161
$
122,114
$
1,718,947
Greater than 90 days and
accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Construction and land
development
30-59 days
$
4,293
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
4,293
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
4,293
-
-
-
-
-
-
-
4,293
Current
342,293
274,594
93,692
19,866
1,497
9,053
49,500
-
790,495
Total
$
346,586
$
274,594
$
93,692
$
19,866
$
1,497
$
9,053
$
49,500
$
-
$
794,788
Greater than 90 days and
accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Residential real estate
30-59 days
$
-
$
3,867
$
-
$
$
-
$
-
$
-
$
-
$
3,877
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
Total past due
-
3,987
-
-
-
-
-
3,997
Current
77,703
83,443
124,413
45,481
37,395
34,852
1,649
405,127
Total
$
77,703
$
87,430
$
124,413
$
45,491
$
37,395
$
34,852
$
1,649
$
$
409,124
Greater than 90 days and
accruing
$
-
$
$
-
$
-
$
-
$
-
$
-
$
-
$
Multifamily real estate
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
60-89 days
-
-
-
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
-
-
-
-
-
-
-
Current
85,785
26,705
6,915
11,938
2,491
86,879
16,545
237,984
Total
$
85,785
$
26,705
$
6,915
$
11,938
$
2,491
$
$
86,879
$
16,545
$
237,984
Greater than 90 days and
accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Consumer
30-59 days
$
-
$
-
$
-
$
-
$
-
$
-
$
$
-
$
60-89 days
-
-
-
-
-
-
Greater than 90 days
-
-
-
-
-
-
-
-
-
Total past due
-
-
-
-
-
Current
7,917
1,347
2,641
51,386
-
63,699
Total
$
7,917
$
1,347
$
2,643
$
$
$
$
51,416
$
-
$
63,736
Greater than 90 days and
accruing
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
As of December 31, 2022
Amortized Cost Basis by Origination Year
and Past Due Status
Amortized Cost Basis
2017 and Prior
Revolving loans
Revolving loans
converted to
term loans
Total
Total
30-59 days
$
4,313
$
8,651
$
-
$
1,190
$
-
$
1,049
$
2,844
$
-
$
18,047
60-89 days
-
-
-
1,472
Greater than 90 days
-
1,383
7,681
-
9,352
Total past due
4,313
8,969
1,196
1,388
1,061
11,505
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
$
-
$
$
$
-
$
-
$
-
$
$
-
$
Non-accrual Loan Analysis
Non-accrual loans are loans for which the Company does not record interest
income. The accrual of interest on loans is discontinued
at the time the loan is 90 days past due unless the credit is well secured and in process of collection.
Past due status is based on contractual
terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date,
if collection of principal or interest is
considered doubtful. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current
and future payments are reasonably assured. The following table presents the Company’s
non-accrual loans by loan segments at
December 31, 2022:
As of December 31, 2022
Amortized Cost Basis by Origination
Year and Internal Risk Rating
Amortized Cost Basis
2017 and
Prior
Revolving
loans
Revolving
loans
converted to
term loans
Total Non-
accrual Loans
Non-accrual
Loans with no
related
Allowance
(Dollars in thousands)
Commercial and
industrial
$
-
$
$
-
$
$
1,383
$
$
-
$
-
$
1,505
$
1,505
Commercial and
industrial lines of
credit
-
-
-
-
-
-
6,479
-
6,479
6,479
Energy
-
-
-
-
-
-
-
Commercial real
estate
-
2,479
-
-
-
-
-
-
2,479
2,479
Construction and land
development
-
-
-
-
-
-
-
-
-
-
Residential real estate
-
-
-
-
-
-
-
Multifamily real estate
-
-
-
-
-
-
-
-
-
-
Consumer
-
-
-
-
-
-
-
-
-
-
Total
$
-
$
2,583
$
-
$
$
1,383
$
$
7,097
$
$
11,272
$
11,272
Interest income recognized on non-accrual loans was $
1.5
million for the year ended December 31, 2022.
Allowance for Credit Losses
The following table presents the activity in the allowance for credit losses and
allowance for credit losses on off-balance sheet credit
exposures by portfolio segment for the year ended December 31, 2022:
For the Year Ended
December 31, 2022
Commercial
and
industrial
(1)
Commercial
and
Industrial
Lines of
Credit
(1)
Energy
Commercial
Real Estate
Construction and
Land Development
Residential Real
Estate
(2)
Multifamily
Real Estate
(2)
Consumer
Total
(Dollars in thousands)
Allowance for Credit Losses:
Beginning balance, prior to adoption of
ASU 2016-13
$
20,352
$
-
$
9,229
$
19,119
$
3,749
$
5,598
$
-
$
$
58,375
Impact of ASU 2016-13 adoption
(10,213)
8,866
(39)
(186)
(83)
(2,552)
2,465
(5)
(1,747)
PCD allowance for credit loss at
acquisition
-
-
Charge-offs
(791)
(3,971)
(4,651)
(1,102)
-
(217)
-
(13)
(10,745)
Recoveries
1,730
2,008
2,334
-
-
-
6,979
Provision (release)
1,105
6,461
(2,151)
(3,230)
1,263
(228)
3,401
Day 1 CECL provision expense
1,316
-
2,284
4,596
Ending balance
$
12,272
$
14,531
$
4,396
$
19,504
$
5,337
$
3,110
$
2,253
$
$
61,775
Allowance for Credit Losses on Off-Balance Sheet Credit
Exposures:
Beginning balance, prior to adoption of
ASU 2016-13
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
Impact of ASU 2016-13 adoption
3,914
5,184
Provision (release)
(34)
2,632
(3)
(123)
3,047
Day 1 CECL provision expense
-
-
-
Ending balance
$
$
$
$
$
6,830
$
$
$
$
8,688
(1)
Prior to the adoption of ASU 2016-13, the Commercial and Industrial
lines of credit were consolidated under the Commercial and
Industrial segment.
(2)
Prior to the adoption of ASU 2016-13, the Residential Real
Estate and Multifamily Real Estate segments were consolidated under the
Residential and Multifamily Real Estate segment.
Credit quality indicators improved meaningfully during 2022 which influenced
the level of qualitative factors management applied
to the ACL estimate.
Other considerations for the ACL as of December 31, 2022 included the strong loan growth, particularly in commercial
and industrial and commercial and industrial line of credit loans.
Collateral Dependent Loans:
Collateral dependent loans are loans for which the repayment is expected to be provided
substantially through the operation or sale
of the collateral and the borrower is experiencing financial difficulty. The following
table presents the amortized cost balance of loans
considered collateral dependent by loan segment and collateral type as of
December 31, 2022:
As of December 31, 2022
Loan Segment and Collateral Description
Amortized Cost of
Collateral
Dependent Loans
Related Allowance
for Credit Losses
Amortized Cost of
Collateral
Dependent Loans
with no related
Allowance
(Dollars in thousands)
Commercial and industrial
All business assets
$
1,489
$
-
$
1,489
Commercial and industrial lines of credit
All business assets
6,492
-
6,492
Energy
Oil and natural gas properties
-
Commercial real estate
Commercial real estate properties
-
Residential real estate
Residential real estate properties
-
-
-
Multifamily real estate
Multifamily real estate properties
-
-
-
Consumer
Vehicles & other personal assets
-
$
8,728
$
$
8,689
Troubled Debt Restructurings
TDRs are those extended to borrowers who are experiencing financial
difficulty and who have been granted a concession, excluding
loan modifications as a result of the COVID-19 pandemic. The modification
of terms typically includes the extension of maturity, reduction
or deferment of monthly payment, or reduction of the stated interest rate.
For the years ended December 31, 2022 and 2021,
no
loans and $
4.8
million in loans, respectively, were restructured under the TDR
guidance. The outstanding balance of TDRs was $
30.5
million and $
40.4
million as of December 31, 2022 and 2021, respectively.
Disclosures under Previously Applicable
GAAP
The following disclosures are presented under previously applicable GAAP. The description
of the general characteristics of the
loan rating categories is as described above. The following table presents the credit
risk profile of the Company’s loan portfolio based on an
internal rating category and portfolio segment as of December 31, 2021:
As of December 31, 2021
Pass
Special
Mention
Substandard
Performing
Substandard
Non-
performing
Doubtful
Loss
Total
(Dollars in thousands)
Commercial
$
1,356,883
$
16,201
$
23,739
$
4,858
$
-
$
-
$
1,401,681
Energy
184,269
73,196
5,246
13,595
2,554
-
278,860
Commercial real estate
1,172,323
86,768
11,782
10,222
-
-
1,281,095
Construction and land development
578,758
-
-
-
-
-
578,758
Residential and multifamily real
estate
593,847
6,508
-
-
600,816
PPP
64,805
-
-
-
-
-
64,805
Consumer
63,605
-
-
-
-
-
63,605
Total
$
4,014,490
$
176,422
$
47,275
$
28,879
$
2,554
$
-
$
4,269,620
The following table presents the Company’s loan portfolio aging analysis of the
recorded investment in loans as of December 31,
2021:
As of December 31, 2021
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
More
Total Past Due
Current
Total Loans
Receivable
Loans >= 90
Days and
Accruing
(Dollars in thousands)
Commercial
$
$
$
1,037
$
1,719
$
1,399,962
$
1,401,681
$
Energy
-
-
4,644
4,644
274,216
278,860
-
Commercial real estate
-
1,077
1,280,018
1,281,095
-
Construction and land development
-
1,083
577,675
578,758
-
Residential and multifamily real
estate
-
600,228
600,816
-
PPP
-
-
-
-
64,805
64,805
-
Consumer
-
-
63,506
63,605
-
Total
$
1,671
$
1,858
$
5,681
$
9,210
$
4,260,410
$
4,269,620
$
The following table presents the Company’s
loans on non-accrual as of December 31, 2021:
As of December 31,
(Dollars in thousands)
Commercial
$
4,858
Energy
16,148
Commercial real estate
10,222
Construction and land development
-
Residential and multifamily real estate
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 or For the Year
Ended December 31, 2021
Commercial
Energy
Commercial
Real Estate
Construction
and Land
Development
Residential
and
Multifamily
Real Estate
PPP
Consumer
Total
(Dollars in thousands)
Period end allowance for loan losses allocated to:
Individually evaluated for
impairment
$
$
2,100
$
3,164
$
-
$
-
$
-
$
-
$
5,597
Collectively evaluated for
impairment
$
20,019
$
7,129
$
15,955
$
3,749
$
5,598
$
-
$
$
52,778
Ending balance
$
20,352
$
9,229
$
19,119
$
3,749
$
5,598
$
-
$
$
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
A loan is considered impaired when based on current information and
events, it is probable the Company will be unable to collect
all amounts due from the borrower in accordance with the contractual terms
of the loan. Impaired loans include non-performing loans but
also include loans modified in TDRs where concessions have been granted
to borrowers experiencing financial difficulties. The intent of
concessions is to maximize collection. The following table presents loans individually
evaluated for impairment:
As of or For the Year Ended December 31, 2021
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
Average
Investment
Impaired
Loans
Interest
Income
Recognized
(Dollars in thousands)
Loans without a specific valuation
Commercial
$
4,659
$
4,740
$
-
$
7,155
$
Energy
3,509
7,322
-
4,548
Commercial real estate
1,729
1,729
-
1,800
Construction and land development
-
-
-
-
-
Residential and multifamily real estate
3,387
3,387
-
3,392
PPP
-
-
-
-
-
Consumer
-
-
-
-
-
Loans with a specific valuation
Commercial
1,080
1,080
Energy
12,695
17,977
2,100
14,117
Commercial real estate
29,868
30,854
3,164
28,876
Construction and land development
-
-
-
-
-
Residential and multifamily real estate
-
-
-
-
-
PPP
-
-
-
-
-
Consumer
-
-
-
-
-
Total
Commercial
5,739
5,820
7,651
Energy
16,204
25,299
2,100
18,665
Commercial real estate
31,597
32,583
3,164
30,676
1,011
Construction and land development
-
-
-
-
-
Residential and multifamily real estate
3,387
3,387
-
3,392
PPP
-
-
-
-
-
Consumer
-
-
-
-
-
$
56,927
$
67,089
$
5,597
$
60,384
$
1,210
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses for off-balance sheet credit
exposures unless the obligation is unconditionally
cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate is
calculated for each loan segment and includes consideration of the likelihood
that funding will occur and an estimate of the expected credit
losses on commitments expected to be funded over its estimated life. For
each pool of contractual obligations expected to be funded, the
Company uses the reserve rate established for the related loan pools. The $
million allowance for credit losses on off-balance sheet credit
exposures
at December 31, 2022 is included in “interest payable and other liabilities” on
the statement of financial condition.
The following categories of off-balance sheet credit exposures have been
identified:
Loan commitments - include revolving lines of credit, non-revolving lines
of credit, and loans approved that are not yet funded.
Risks inherent to revolving lines of credit often are related to the susceptibility of
an individual or business experiencing
unpredictable cash flow or financial troubles, thus leading to payment
default. The primary risk associated with non-revolving lines
of credit is the diversion of funds for other expenditures.
Letters of credit - are primarily established to provide assurance to the beneficiary
that the applicant will perform certain obligations
arising out of a separate transaction between the beneficiary and applicant.
If the obligation is not met, it gives the beneficiary the
right to draw on the letter of credit.
Note 5:
Premises and Equipment
Major classifications of premises and equipment, stated at cost, are as follows:
As of December 31,
(Dollars in thousands)
Land
$
7,579
$
7,384
Building and improvements
65,101
62,344
Furniture and fixtures
14,523
14,106
Equipment
10,066
9,596
Construction in progress
1,172
Premises and equipment
98,441
93,939
Less: accumulated depreciation
32,457
27,870
Premises and equipment, net
$
65,984
$
66,069
The Company recorded $
4.7
million, $
4.9
million and $
4.9
million of depreciation expense during 2022, 2021 and 2020,
respectively, as a component of other non-interest expense in the consolidated
statements of operations.
Note 6:
Leases
The Company’s leases primarily include bank branches located in
Kansas City, Missouri; Tulsa, Oklahoma; Dallas, Texas; Frisco
Texas; and Phoenix, Arizona. The Company also acquired several additional leased locations in connection
with the Central acquisition in
Denver and Colorado Springs, Colorado. The remaining terms on these branch
leases range from less than
one year
to
twenty years
with
certain options to renew. Renewal terms can extend the lease term between
five years
and
twenty years
. The exercise of lease renewal options
is at the Company’s sole discretion. When it is reasonably certain that the Company
will exercise its option to renew or extend the lease term,
that option is included in the estimated value of the right of use (“ROU”) asset and lease liability. The Company’s
lease agreements do not
contain any material residual value guarantees or material restrictive covenants. As of December 31, 2022, the
Company recognized one
finance lease and the remaining Company leases are classified as operating leases.
The ROU asset is included in “Other assets” on the consolidated statement of
financial condition, and was $
30.5
million at
December 31, 2022. Certain adjustments to the ROU asset may be
required for items such as initial direct costs paid or incentives received.
The lease liability is located in “Interest payable and other liabilities” on the
consolidated statement of financial condition and was $
million at December 31, 2022.
As of December 31, 2022, the weighted-average remaining lease term is
11.6
years and the weighted-average discount rate was
2.54
% utilizing the Company’s incremental FHLB borrowing rate for borrowings of
a similar term at the date of lease commencement.
The following table presents components of operating lease expense in
the accompanying consolidated statements of operations for
the year ended December 31, 2022:
Year Ended December 31, 2022
(Dollars in thousands)
Finance lease amortization of right-of-use asset
$
Finance leases interest on lease liability
Operating lease expense
2,577
Variable lease expense
1,222
Short-term lease expense
Total lease expense
$
4,235
Future minimum lease payments under operating leases were as follows:
Operating Leases
Finance Lease
(Dollars in thousands)
$
3,583
$
3,289
3,309
3,350
3,340
Thereafter
12,619
8,296
Total lease payments
29,490
10,784
Less: imputed interest
3,262
3,163
Total
$
26,228
$
7,621
Rent expense for the years ended December 31, 2021 and 2020 was $
3.5
million and $
2.9
million, respectively.
Supplemental cash flow information - Operating cash flows paid for
operating lease amounts included in the measurement of lease
liabilities was $
3.0
million for the year ended December 31, 2022. Operating cash flows paid for finance
lease amounts included in the
measurement of lease liabilities was $
0.4
million for the year ended December 31, 2022. During the year ended December 31,
2022, the
Company recorded ROU assets in the amount of $
23.6
million that were exchanged for operating lease liabilities and $
7.8
million that were
exchanged for finance lease liabilities.
Note 7:
Goodwill and Core Deposit Intangible
In connection with our acquisition of Central, the Company recorded
goodwill of $
12.8
million. Goodwill is measured as the excess
of the fair value of consideration paid over the fair value of net assets acquired.
No
goodwill impairment was recorded during the years
ended December 31, 2022 or December 31, 2021.
The Company recorded a core deposit intangible (“CDI”) of $
16.5
million as part of the Central acquisition. The Company is
amortizing the CDI over its estimated useful life of approximately
years using the sum of the years’ digits accelerated method. The
Company recognized core deposit intangible amortization expense
of $
0.4
million for the year ended December 31, 2022 which is included
in other non-interest expense in the consolidated statement of operations.
The gross carrying amount of goodwill and the gross carrying amount
and accumulated amortization of the core deposit intangible
at December 31, 2022 and 2021 were:
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
(Dollars in thousands)
December 31, 2022
Goodwill
$
12,836
$
-
$
12,836
Core deposit intangible
17,479
1,234
16,245
Total goodwill and intangible assets
$
30,315
$
1,234
$
29,081
December 31, 2021
Core deposit intangible
$
1,014
$
$
Total goodwill and intangible assets
$
1,014
$
$
The estimated aggregate future amortization expense over the next five years
for the core deposit intangible is as follows at
December 31, 2022:
(Dollars in thousands)
$
3,089
2,762
2,436
2,109
1,783
Note 8:
Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and
economic conditions.
The Company
principally manages its exposures to a wide variety of business and operational risks
through management of its core business activities. The
Company manages economic risks, including interest rate, liquidity, and
credit risk primarily by managing the amount, sources, and duration
of its assets and liabilities and the use of derivative financial instruments.
Specifically, the Company enters into derivative financial
instruments to manage exposures that arise from business activities that result in the receipt
or payment of future known and uncertain cash
amounts, the value of which are determined by interest rates.
Cash Flow Hedges of Interest Rate Risk
The Company uses interest rate derivatives to add stability to interest income
and expense and to manage its exposure to interest
rate movements. To accomplish this objective, the Company uses interest rate swaps and collars
as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve
the receipt of variable amounts from a counterparty in exchange for the
Company making fixed-rate payments over the life of the agreements without
exchange of the underlying notional amount. Interest rate
collars designated as cash flow hedges involve payments of variable-rate
amounts if interest rates rise above the cap strike rate on the
contract and the receipt of variable-rate amounts if interest rates fall below the
floor strike rate on the contract. During 2022, such derivatives
were used to hedge the variable cash flows associated with existing variable
-rate loan assets.
The five swaps that were entered into in 2021
were terminated during the third quarter of 2022; however, the amortization
of the gains on these instruments will start in 2023 based on the
original effective dates of these swaps.
The Company also entered into a new interest rate collar during the
third quarter of 2022. Derivatives
designated and that qualify as cash flow hedges include
one
instrument with a notional value of $
million at December 31, 2022, and
five
instruments with an aggregate notional value of $
million at December 31, 2021.
For derivatives designated and that qualify as cash flow hedges of interest rate
risk, the gain or loss on the derivative is recorded in
Accumulated Other Comprehensive Income (Loss) (“AOCI”) and
subsequently reclassified into interest income or expense in the same
period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to
interest income and expense as interest payments are received and made
on the Company’s variable-rate assets and liabilities. The derivative
financial instruments did not impact the consolidated statements of operations
for the years ended December 31, 2022 or 2021. During the
next twelve months, the Company estimates that an $
0.1
million will be reclassified as a reduction to interest expense.
The Company is hedging its exposure to the variability in future cash flows for forecasted
transactions over a maximum period of
6.4
years.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from
a service provided to clients. The Company executes
interest rate swaps with customers to facilitate their respective risk management
strategies.
Those interest rate swaps are simultaneously
hedged by offsetting derivatives that the Company executes with a third-party,
such that the Company minimizes its net risk exposure
resulting from such transactions. Interest rate derivatives associated
with this program do not meet the strict hedge accounting requirements
and changes in the fair value of both the customer derivatives and the offsetting
derivatives are recognized directly in earnings.
As of
December 31, 2022 and 2021, the Company had
swaps with an aggregate notional amount of $
million and
swaps with an
aggregate notional amount of $
million, respectively.
The Company’s derivative financial instruments that are not designated
as hedging instruments, including swap fees earned upon
origination and credit valuation adjustments (“CVA”) that repre
sent the risk of a counterparty’s default,
are reported on the consolidated
statements of operations as swap fee income, net. During 2022,
the Company recorded net swap fees of $
thousand.
During 2021, the
Company recorded a $
thousand gain for CVA adjustments primarily related to one swap.
Fair Values of Derivative Instruments on the Statement of Financial Condition
The table below presents the fair value of the Company’s derivative financial
instruments and their classification on the consolidated
statements of financial condition as of December 31, 2022 and 2021:
Asset Derivatives
Liability Derivatives
Statement of
Financial
Condition
As of December 31,
Statement of
Financial
Condition
As of December 31,
Location
Location
(Dollars in thousands)
Interest rate products:
Derivatives designated as hedging instruments
Other assets
$
-
$
Other
liabilities
$
5,403
$
Derivatives not designated as hedging
instruments
Other assets
$
11,038
$
11,305
Other
liabilities
$
11,039
$
11,322
Total
$
11,038
$
11,308
$
16,442
$
11,887
Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive (Loss) Income
The table below presents the effect of cash flow hedge accounting on Accumulated Other Comprehensive
(Loss) Income as of
December 31, 2022 and 2021.
December 31, 2022
Gain or (Loss)
Recognized in OCI
on Derivative
Gain or (Loss)
Recognized in OCI
Included Component
Gain or (Loss)
Recognized in OCI
Excluded
Component
Location of Gain
or (Loss)
Recognized from
Accumulated
Other
Comprehensive
(Loss) Income into
Income
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
Included Component
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
Excluded
Component
(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products
$
(5,403)
$
(5,403)
$
-
Interest Income
$
-
$
-
$
-
Interest Rate Products -
terminated
3,852
3,852
-
Interest Expense
-
-
-
Total
$
(1,551)
$
(1,551)
$
-
$
-
$
-
$
-
December 31, 2021
Gain or (Loss)
Recognized in OCI
on Derivative
Gain or (Loss)
Recognized in OCI
Included Component
Gain or (Loss)
Recognized in OCI
Excluded
Component
Location of Gain
or (Loss)
Recognized from
Accumulated
Other
Comprehensive
(Loss) Income into
Income
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
Included Component
Gain or (Loss)
Reclassified from
Accumulated OCI
into Income
Excluded
Component
(Dollars in thousands)
Derivatives in Cash Flow Hedging Relationships
Interest Rate Products
$
(562)
$
(562)
$
-
Interest Expense
$
-
$
-
$
-
Credit Risk Related Contingent Features
As of December 31, 2022, the fair value of non-designated derivatives
in a net asset position, which includes accrued interest but
excludes any adjustment for non-performance risk, related to these agreements
was $
11.0
million. As of December 31, 2022, the Company
has minimum collateral thresholds with certain of its derivative counterparties
and has received collateral of $
4.9
million.
Note 9:
Foreclosed Assets
Foreclosed asset activity was as follows:
As of or for the Year Ended December 31,
(Dollars in thousands)
Beginning balance
$
1,148
$
2,347
$
3,619
Transfers from loan portfolio, at fair value
-
-
Foreclosed asset acquired
-
-
Direct write-downs
-
(629)
(1,118)
Sales or other proceeds from foreclosed assets
(175)
(628)
(1,045)
Gain (loss) on sale of foreclosed assets
-
(39)
Ending balance
$
1,130
$
1,148
$
2,347
Foreclosed assets consisted of
two
commercial use facilities at December 31, 2022. For the year ended December
31, 2022, the
Company purchased a foreclosed property as part of the Central acquisition
and received proceeds from expired earnest funds on a pre-
existing property.
For the year ended December 31, 2021, the Company sold certain raw land foreclosed
upon in 2019 and a commercial use
facility foreclosed upon in 2020. During 2020, the Company sold the industrial
facilities that were foreclosed upon in 2019 and impaired the
raw land foreclosed upon in 2019.
Gain (loss) on the sale of foreclosed assets are reported on the consolidated
statements of operations under the foreclosed assets, net
section.
Note 10:
Interest-bearing Time Deposits
Interest-bearing time deposits in denominations of $250 thousand or
more were $
million and $
million as of December 31,
2022 and 2021, respectively.
The Company acquires brokered deposits in the normal course of business. At December 31, 2022 and 2021, brokered
deposits of
approximately $
million and $
million, respectively, were included in the Company’s time deposit balance. Reciprocal
deposits, which
includes The Certificate of Deposit Account Registry Services (“CDARS”) discussed below, are treated as core deposits instead of
brokered
deposits and are not included in the above amounts.
The Company is a member of CDARS that allows depositors to receive FDIC insurance
on amounts greater than the FDIC
insurance limit, which is currently $250,000. CDARS allows institutions to break
large deposits into smaller amounts and place them in a
network of other CDARS institutions to ensure full FDIC insurance is gained
on the entire deposit. CDARS totaled approximately $
million
and $
million as of December 31, 2022 and 2021, respectively.
The scheduled maturities for time deposits are provided in
Note 11: Borrowing Arrangements
below.
Note 11:
Borrowing Arrangements
The following table summarizes borrowings at December 31, 2022
and 2021:
As of and For the Year Ended
December 31,
(Dollars in thousands)
Balance
Rate
(7)
Maximum Balance at
Any End of Month
Balance
Rate
(7)
Maximum Balance at
Any End of Month
Repurchase agreements
(1)
$
-
NA
%
$
5,695
$
-
NA
%
$
6,218
Federal funds purchased
(2)
20,000
4.65
20,000
-
NA
-
FHLB advances
(3)
143,143
2.27
236,600
236,600
1.92
293,100
FHLB line of credit
(3)
74,968
4.48
140,000
-
NA
-
TIB line of credit
(4)
5,000
7.50
5,000
-
NA
-
SBA secured borrowing
(5)
9,396
NA
10,897
-
NA
-
Trust preferred security
(6)
1,061
6.51
%
$
1,061
1,009
1.94
%
$
1,009
Total borrowings
$
253,568
$
237,609
(1)
Repurchase agreements consist of Bank obligations to other parties payable
on demand and generally have one day maturities. The
obligations are collateralized by securities of U.S. government sponsored enterprises
and mortgage-backed securities and such collateral
is held by a third-party custodian. The year-to-date average daily balance was $
and $
million for the years ended December 31, 2022
and 2021, respectively. The securities, mortgage-backed government
sponsored residential securities, pledged for customer repurchase
agreements were $
at both December 31, 2022 and 2021.
(2)
Federal funds purchased include short-term funds that are borrowed from
another bank. The Bank is part of a third-party service that
allows us to borrow amounts from another bank if the bank has approved
us for credit. Federal funds purchased generally have one day
maturities.
(3)
FHLB advances and line of credit are collateralized by a blanket floating
lien on certain loans, as well as, unrestricted securities. FHLB
advances are at a fixed rate, ranging from
0.95
% to
4.25
% and are subject to restrictions or penalties in the event of prepayment. The
FHLB line of credit has a variable interest rate that reprices daily based on FHLB’s cost of
funds and matures on May 14, 2023.
(4)
TIB line of credit is a general line of credit maintained by the Company
for short-term liquidity.
(5)
As part of the Central acquisition, the Company acquired certain SBA loans that failed the derecognition criteria of ASC 860 and
therefore are accounted
for as secured borrowings.
The secured borrowing was recorded at estimated fair value at the date of acquisition
and reduces over time in connection with the related loan balance.
(6)
On June 30, 2010, the Company assumed a liability with a fair value of $
million related to the assumption of trust preferred securities
issued by Leawood Bancshares Statutory Trust I for $
million on September 30, 2005. In 2012, the Company settled litigation related
to
the trust preferred securities which decreased the principal balance
by $
1.5
million and the recorded balance by approximately
$
thousand. The difference between the recorded amount and the contract value of $
2.5
million is being accreted to the maturity date
in 2035. Distributions will be paid on each security at a variable annual rate
of interest, equal to LIBOR, plus
1.74
%.
(7)
Represents the year-end weighted average interest rate.
The following table summarizes the Company’s other borrowing capacities
at December 31, 2022 and 2021:
As of December 31,
(Dollars in thousands)
FHLB borrowing capacity relating to loans
$
391,910
$
435,562
FHLB borrowing capacity relating to securities
-
-
Total FHLB borrowing capacity
$
391,910
$
435,562
Unused Federal Reserve borrowing capacity
$
503,899
$
428,786
The scheduled maturities, excluding interest, of the Company’s borrowings at
December 31, 2022 were as follows:
As of December 31, 2022
Within One
Year
One to Two
Years
Two to Three
Years
Three to
Four Years
Four to Five
Years
After Five
Years
Total
(Dollars in thousands)
Time deposits
$
588,981
$
349,734
$
1,997
$
1,586
$
3,269
$
-
$
945,567
Fed funds purchased &
repurchase agreements
20,000
-
-
-
-
-
20,000
FHLB borrowings
37,579
1,610
11,454
-
55,500
37,000
143,143
FHLB line of credit
74,968
-
-
-
-
-
74,968
TIB line of credit
5,000
-
-
-
-
-
5,000
SBA secured borrowing
-
-
-
-
-
9,396
9,396
Trust preferred securities
(1)
-
-
-
-
-
1,061
1,061
Total
$
726,528
$
351,344
$
13,451
$
1,586
$
58,769
$
47,457
$
1,199,135
(1)
The contract value of the trust preferred securities is $
2.6
million and is currently being accreted to the maturity date of 2035.
Note 12:
Income Taxes
The provision for income taxes includes these components:
For the Year Ended December 31,
(Dollars in thousands)
Current tax expense
$
17,943
$
14,892
$
7,970
Deferred income tax (benefit) expense
(1,970)
2,664
(5,257)
Income tax expense
$
15,973
$
17,556
$
2,713
An income tax reconciliation at the statutory rate to the Company’s actual income tax
expense is shown below:
For the Year Ended December 31,
(Dollars in thousands)
Computed at the statutory rate (21%)
$
16,290
$
18,263
$
3,216
Increase (decrease) resulting from
Tax-exempt income
(3,546)
(3,672)
(3,109)
Non-deductible expenses
State income taxes, net of federal benefits
2,785
3,030
Stock-based compensation
(190)
(172)
Goodwill impairment
-
-
1,553
Other adjustments
(55)
(125)
Income tax expense
$
15,973
$
17,556
$
2,713
The tax effects of temporary differences related to deferred taxes shown
on the consolidated statements of financial condition within
other assets are presented below:
As of December 31,
(Dollars in thousands)
Deferred tax assets
Net unrealized loss on securities available-for-sale
$
20,295
$
-
Allowance for credit losses
16,710
14,051
Lease incentive
Loan fees
4,048
3,227
Accrued expenses
3,379
2,735
Deferred compensation
2,166
2,418
State tax credit
-
1,033
Other
1,469
2,057
Total deferred tax asset
48,518
26,029
Deferred tax liability
Net unrealized gain on securities available-for-sale
-
(6,967)
FHLB stock basis
(436)
(757)
Premises and equipment
(2,042)
(2,602)
Other
(1,018)
(1,229)
Total deferred tax liability
(3,496)
(11,555)
Net deferred tax asset
$
45,022
$
14,474
The Company had a $
1.0
million deferred tax asset as of December 31, 2021 due to state tax credits, which were
completely
recognized in 2022.
The Company has approximately $
1.0
million of federal net operating loss carry-forwards, which expire
after 2028. The net
operating loss is subject to annual usage limitations of $
thousand per year, but may include unused amounts from prior years.
The
Company fully expects to utilize the entire net operating loss carry-forwards before
they expire. Due to the carry forward of federal net
operating losses, all prior years remain subject to examination by federal
tax authorities.
Note 13:
Changes in Accumulated Other Comprehensive (Loss) Income
Amounts reclassified from AOCI and the affected line items in the consolidated statements of operations were as follows:
For the Year Ended December 31,
Affected Line Item in the
Statements of Operations
(Dollars in thousands)
Unrealized gains on available-for-sale
securities
$
$
1,023
$
1,704
Realized gains on available-
for-sale securities
Less: tax expense effect
Income tax expense
Net reclassified amount
$
$
$
1,289
Note 14:
Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies.
The Basel III Capital Rules (“Basel III”) were jointly published by three federal
banking regulatory agencies. Basel III defines the
components of capital, risk weighting and other issues affecting the numerator
and denominator in regulatory capital ratios.
Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
the Company’s consolidated financial statements. The actions may
include dividend payment restrictions, require the adoption of
remedial measures to increase capital, terminate FDIC deposit insurance,
and
mandate the appointment of a conservator or receiver in severe cases. Under
capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital guidelines
that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under U.S. GAAP, regulatory
reporting requirements and regulatory capital
standards. The capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk
weightings and other factors. Furthermore, the Company’s regulators
could require adjustments to regulatory capital not reflected in these
consolidated financial statements.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of total and tier 1 capital (as
defined) to risk-weighted assets (as defined),
common equity tier 1 capital (as defined) to risk-weighted assets (as defined),
and of tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2022, the Company and the Bank
met all capital adequacy requirements to which they are subject.
As of December 31, 2022, the most recent notification from the applicable
regulatory agencies categorized the Bank as
well
capitalized
under the regulatory framework for prompt corrective action. To be categorized as
well capitalized
, the Bank must maintain
minimum total risk-based, tier 1 risk-based, common equity tier 1 risk-based
and tier 1 leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the Bank’s category. The Company’s and the
Bank’s actual capital amounts and ratios as of December 31, 2022
and 2021 are presented in the following table:
Actual
Required to be Considered
Well Capitalized
Required to be Considered
Adequately Capitalized
(1)
Amount
Ratio
Amount
Ratio
Amount
Ratio
(Dollars in thousands)
December 31, 2022
Total Capital to Risk-Weighted Assets
Consolidated
$
715,416
10.5
%
N/A
N/A
$
714,162
10.5
%
Bank
714,300
10.5
$
679,793
10.0
%
713,783
10.5
Tier 1 Capital to Risk-Weighted Assets
Consolidated
644,953
9.5
N/A
N/A
578,131
8.5
Bank
643,837
9.5
543,835
8.0
577,824
8.5
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
643,892
9.5
N/A
N/A
476,108
7.0
Bank
643,837
9.5
441,866
6.5
475,855
7.0
Tier 1 Capital to Average Assets
Consolidated
644,953
10.3
N/A
N/A
249,270
4.0
Bank
$
643,837
10.3
%
$
311,623
5.0
%
$
249,299
4.0
%
December 31, 2021
Total Capital to Risk-Weighted Assets
Consolidated
$
704,544
13.6
%
N/A
N/A
$
544,060
10.5
%
Bank
681,980
13.2
$
517,817
10.0
%
543,708
10.5
Tier 1 Capital to Risk-Weighted Assets
Consolidated
646,169
12.5
N/A
N/A
440,430
8.5
Bank
623,605
12.0
414,253
8.0
440,144
8.5
Common Equity Tier 1 to Risk-Weighted Assets
Consolidated
645,160
12.5
N/A
N/A
362,707
7.0
Bank
623,605
12.0
336,581
6.5
362,472
7.0
Tier 1 Capital to Average Assets
Consolidated
646,169
11.8
N/A
N/A
218,510
4.0
Bank
$
623,605
11.4
%
$
272,958
5.0
%
$
218,366
4.0
%
(1)
Includes capital conservation buffer of
2.5
%.
Note 15:
Employee Benefit Plan
The Company has a retirement savings 401(k) plan covering substantially all employees.
Employees may contribute a portion of
their compensation to the plan. During 2022, Company contributions
to the plan were
% on the first
% of employees’ salary deferral
amounts. During 2021 and 2020, Company contributions to the plan were
% on the first
% of employees’ salary deferral amounts plus
% of employees’ salary deferral amounts over
%, but capped at
%, of employees’ compensation. Additional contributions are
discretionary and are determined annually by the Board of Directors. Company
contributions to the plan were $
million, $
million and
$
million for 2022, 2021 and 2020, respectively.
Note 16:
Revenue from Contracts with Clients
Except for gains or losses from the sale of foreclosed assets, the Company’s revenue from contracts
with clients within the scope of
ASC 606 is recognized in non-interest income. The revenue categories are selected based
on the nature, amount, timing, and uncertainty of
revenue and cash flows. The following presents descriptions of revenue categories within
the scope of ASC 606:
Service charges and fees (rebates) on client accounts -
This segment consists of monthly fees for the services rendered on client
deposit accounts, including maintenance charges, overdraft fees, and
processing fees. The monthly fee structures are typically based on type
of account, volume, and activity. The customer is typically billed monthly and pays the
bill from their deposit account. The Company
satisfies the performance obligation related to providing depository
accounts monthly as transactions are processed and deposit service
charge revenue is recorded.
ATM and credit card interchange income -
This segment consists of fees charged for use of the Company’s ATMs, as well as, an
interchange fee with credit card and debit card service providers. ATM fees and interchange fees are based on the number
of transactions, as
well as, the underlying agreements. Clients are typically billed monthly. The Company
satisfies the performance obligation related to ATM
and interchange fees monthly as transactions are processed and revenue
is recorded.
International
fees -
This segment consists of fees earned from foreign exchange transactions and
preparation of international
documentation. International fees are based on underlying agreements that
describe the Company’s performance obligation and the related
fee. Clients are typically billed and cash is received once the service or transaction
is complete. The Company satisfies the performance
obligation related to international fees monthly as transactions are processed
and revenue is recorded.
Other fees -
This segment consists of numerous, smaller fees such as wire transfer fees, check
cashing fees, and check printing fees.
Other fees are typically billed to clients on a monthly basis. Performance obligations
for other fees are satisfied at the time that the service is
rendered.
Gain or loss on foreclosed assets
- Foreclosed assets are often sold in transactions that may not be considered
a contract with a
client because the sale of the asset may not be an output of the Company’s ordinary
activities. However, sales of nonfinancial assets,
including in-substance nonfinancial assets, should be accounted for in
accordance with ASC 610-20, “Other Income-Gains and Losses from
the Derecognition of Nonfinancial Assets,” which requires the Company to apply certain measurement and
recognition concepts of ASC 606.
Accordingly, the Company recognizes the sale of a foreclosed asset, along
with any associated gain or loss, when control of the asset
transfers to the buyer. For sales of existing assets, this generally will occur
at the point of sale. When the Company finances the sale of the
foreclosed asset to the buyer, the Company must assess whether the buyer is committed
to perform their obligations under the contract and
whether collectability of the transaction price is probable. Once these criteria
are met, the repossessed asset is derecognized and the gain or
loss on sale is recorded upon the transfer of control of the asset to the buyer.
The following table disaggregates the non-interest income subject
to ASC 606 by category:
For the Year Ended December 31,
(Dollars in thousands)
Non-interest income subject to ASC 606
Service charges and fees on customer accounts
$
6,228
$
4,580
$
2,803
ATM and credit card interchange income
6,523
7,996
4,379
International fees
1,408
1,531
1,091
Other fees
Total non-interest income from contracts with clients
14,253
14,241
8,360
Non-interest income not subject to ASC 606
Other non-interest income
3,028
(581)
3,373
Total non-interest income
$
17,281
$
13,660
$
11,733
Note 17:
Stock-Based Compensation
The Company issues stock-based compensation in the form of non-vested
restricted stock, restricted stock units and stock
appreciation rights (“SSARs”) under the 2018 Omnibus Equity Incentive
Plan (“Omnibus Plan”). The Omnibus Plan will expire on the tenth
anniversary of its effective date. The aggregate number of shares authorized for future
issuance under the Omnibus Plan is
1,530,702
shares
as of December 31, 2022. The Company will issue new common shares upon
exercise or vesting of stock-based awards.
During 2018, awards issued under the Stock Settled Appreciation Right Plan, Equity Incentive Plan, Employee Equity
Incentive
Plan and New Market Founder Plan were assumed under the Omnibus Plan
as agreed upon with participants, impacting all participants who
agreed to the assumption. The awards are called “Legacy Awards.” Material terms and conditions of Legacy Awards remain unchanged;
therefore, no modification to their fair market value was required. Going forward,
all awards are issued under the Omnibus Plan.
In addition, the Company has an Employee Stock Purchase Plan (“ESPP”) that
was suspended effective April 1, 2019 and
reinstituted effective July 1, 2020.
The table below summarizes stock-based compensation expense for
the years ended December 31, 2022, 2021, and 2020:
For the Year Ended December 31,
(Dollars in thousands)
Stock appreciation rights
$
$
$
Performance-based stock awards
Restricted stock units and awards
3,200
3,047
3,078
Employee stock purchase plan
Total stock-based compensation
$
4,417
$
4,584
$
4,363
Stock Settled Appreciation
Rights
SSARs are granted based on the fair market value of the Company’s common
stock. SSARs typically vest in equal amounts over a
seven year
period, commencing on the first anniversary of the effective date of grant and have
fifteen-year
contractual terms for Legacy
Awards and
ten-year
contractual terms for all other SSARs. Legacy Awards include retirement eligibility upon the participant’s 65th birthday,
five years
of participation, and after
one year
holding the grant. The exercise of a SSAR entitles the participant to the excess of the exercise
price over the grant price for each SSAR.
Exercise price is based on the fair market value of the Company’s common
shares.
The calculated value of each SSAR is estimated at the grant date using a Black-Scholes
option valuation model. Expected volatility
is primarily based on an internal model that calculates the historical volatility of
the Company’s stock since the IPO and several peer group
banks’ daily average stock prices before the IPO over the expected term. The expected term of stock granted represents the period that
shares
are expected to be outstanding. The risk-free rate for periods within the contractual
life of the share award is based on the U.S. Treasury yield
curve.
For the expected term, the Company uses the simplified method described
in SAB Topic 14.D.2. This method uses an expected term
based on the midpoint between the vesting date and the end of the contractual term. This method
is used for the majority of SSARs, because
the Company does not have a significant pool of SSARs that have been exercised.
For some SSARs that are granted to participants who will
be retirement eligible during the term of the award, a separate analysis is performed
that focuses more on expected retirement date.
The following table provides the range of assumptions used in the Black-Scholes
valuation model, the weighted average grant date
fair value, and information related to SSARs exercised for the following years,
as well as, the remaining compensation cost to be recognized
and period over which the amount will be recognized as of the dates indicated:
For the Year Ended December 31,
(Dollars in thousands, except per share data)
Assumptions:
Expected volatility
44.1
% -
45.41
%
42.93
% -
43.29
%
20.34
%
Expected dividends
0.00%
0.00%
0.00%
Expected term (in years)
7.00
-
7.01
7.00
-
7.01
6.00
Risk-free rate
2.8
% -
3.62
%
0.94
% -
1.36
%
0.38
%
Weighted average grant date fair value per share
$
6.86
$
6.50
$
1.93
Aggregate intrinsic value of SSARs exercised
$
1,578
$
1,297
$
Total fair value of SSARs vested during the year
$
$
1,087
$
1,245
Unrecognized compensation information:
Unrecognized compensation cost
$
$
1,249
$
1,737
Period remaining (in years)
4.7
4.1
3.3
A summary of SSAR activity during and as of December 31, 2022 is presented below:
Stock Settled Appreciation Rights
Units
Weighted Average
Exercise Price
Weighted Average
Remaining
Contractual Term
Outstanding, January 1, 2022
1,473,076
$
11.20
7.13
Granted
26,500
6.86
9.68
Exercised
(284,540)
9.60
Forfeited or expired
(55,796)
11.27
Outstanding, December 31, 2022
1,159,240
$
11.64
6.29
Exercisable, December 31, 2022
961,367
$
11.00
6.03
Performance-Based Stock
Awards (“PBSAs”)
The Company awards PBSAs to key officers of the Company. The stock settled awards
are typically granted annually as determined
by the Compensation Committee. The performance-based shares typically cliff-vest
at the end of
three years
based on attainment of certain
performance metrics developed by the Compensation Committee. The ultimate
number of shares issuable under each performance-based
award is the product of the award target and the award payout percentage given
the level of achievement. The award payout percentages by
level of achievement range between
% of target and
% of target.
During 2016, the Company awarded PBSAs to New Market Founders. A New Market Founder is a non-employee, adviser chosen in
a selected market to facilitate expansion of banking relationships. During
2016,
116,960
PBSAs were granted and cliff-vested on
December 31, 2021. The Company adopted ASU 2018-07 in the first quarter of 2019, which set the fair market value for
these awards. The
Company determined that no substantial service existed for these awards,
resulting in a cumulative effect adjustment of approximately
$
million to retained earnings.
The New Market Founder PBSAs were based upon
four
equally weighted market measures: total assets, total loans, return on assets
and classified assets to capital as of December 31, 2021 that resulted
in
139,709
common shares that vested and were issued in 2022. The
% payout percentage resulted in $
thousand of expense being recognized during the year ended December
31, 2021. No expense was
recorded in 2022 related to these awards.
During 2022,
19,328
PBSAs granted in 2019 did not meet the target payout threshold and were
forfeited. Additionally, in 2022, the
vesting dates for one former employee’s PBSA award were accelerated and
1,958
shares were issued at target.
During 2022,
66,667
PBSAs were granted. The performance metrics included a three-year cumulative
earnings per share target and
a cumulative relative total shareholder return target.
The following table summarizes the status of and changes in the performance-based
awards:
Performance-Based Awards
Number of Shares
Weighted Average
Grant Date Fair Value
Unvested, January 1, 2022
98,352
$
13.59
Granted
66,667
16.04
Vested
(1,958)
13.55
Forfeited
(28,775)
14.94
Unvested, December 31, 2022
134,286
$
14.52
Unrecognized stock-based compensation expense related to the performance
grants issued through December 31, 2022 was
$
1.2
million and is expected to be recognized over
1.9
years.
Restricted Stock Units (“RSUs”) and Restricted Stock
Awards (“RSAs”)
The Company issues RSUs and RSAs to provide additional incentives to key officers,
employees, and non-employee directors.
Awards are typically granted annually as determined by the Compensation
Committee. The service based RSUs typically vest in equal
amounts over
three years
. The service based RSAs typically cliff-vest after
one year
.
The following table summarizes the status of and changes in the RSUs and RSAs:
Restricted Stock Units and Awards
Number of Shares
Weighted Average
Grant Date Fair Value
Unvested, January 1, 2022
383,630
$
13.52
Granted
306,627
14.75
Vested
(220,356)
13.88
Forfeited
(52,921)
14.35
Unvested, December 31, 2022
416,980
$
14.13
Unrecognized stock-based compensation expense related to restricted stock
grants issued through December 31, 2022 was
$
3.6
million and is expected to be recognized over
1.9
years.
Employee Stock Purchase Plan
The Company has an ESPP whereby employees are eligible for the plan when they have met certain
requirements concerning period
of credited service and minimum hours worked. The price an employee pays for shares is
85.0
% of the fair market value of Company
common stock on the last day of the offering period.
The offering periods are the six-month periods commencing on January
1 and July 1 of
each year and ending on June 30 and December 31 of each year. There are no vesting or other
restrictions on the stock purchased by
employees under the ESPP.
The calculated value of each unit award is estimated at the start of the offering period
using a Black-Scholes option valuation model
that used the assumptions noted in the following table:
For the Year Ended December 31,
Assumptions:
Expected volatility
24.1
% -
28.00
%
5.99
% -
32.00
%
22.50
%
Expected dividends
0.00
%
0.00
%
0.00
%
Expected term (in years)
0.50
0.50
0.50
Risk-free rate
0.19
% -
2.52
%
0.03
% -
0.09
%
0.17
%
Note 18:
Stock Warrants
The Company had
80,000
and
113,500
outstanding, fully vested warrants to purchase common stock at a strike price
of $
5.00
per
share as of December 31, 2022 and 2021, respectively, as
33,500
warrants were exercised during 2022. The
113,500
warrants were modified
during 2018 to extend the expiration date from June 30, 2019 to April 26, 2023. The strike price continues to be $
5.00
per share.
Note 19:
Stockholders’ Equity
Earnings per share
The following table presents the computation of basic and diluted earnings per
share:
For the Year Ended December 31,
(Dollars in thousands, except per share data)
Earnings per Share
Net Income
$
61,599
$
69,413
$
12,601
Weighted average common shares
49,489,860
51,291,428
52,070,624
Earnings per share
$
1.24
$
1.35
$
0.24
Diluted Earnings per Share
Net Income
$
61,599
$
69,413
$
12,601
Weighted average common shares
49,489,860
51,291,428
52,070,624
Effect of dilutive shares
512,194
739,154
477,923
Weighted average dilutive common shares
50,002,054
52,030,582
52,548,547
Diluted earnings per share
$
1.23
$
1.33
$
0.24
Stock-based awards not included because to do so would be antidilutive
523,768
658,100
1,014,639
Share repurchases
On October 18, 2021, the Company announced that its Board of Directors adopted
a new stock repurchase program. Under the
repurchase program, the Company may repurchase up to $
million of the Company’s common stock. As of December 31, 2021, the
Company had repurchased $
million, representing
566,164
common shares.
This repurchase program was completed in the third quarter of
2022.
On May 10, 2022, the Company announced that its Board of Directors approved
a new share repurchase program under which the
Company may repurchase up to $
million of its common stock. As of December 31, 2022, $
million remains available for repurchase
under this share repurchase program.
During 2022, the Company repurchased $
million, representing
2,448,428
common shares, under the repurchase programs.
Note 20:
Disclosure about Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market
participants at the measurement date. Fair value measurements must maximize
the use of observable inputs and minimize the use of
unobservable inputs. There is a hierarchy of three levels of inputs that may be used
to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities,
quoted prices in
markets that are not active or other inputs that are observable or can be corroborated
by observable market data for
substantially the full term of the assets or liabilities.
Level 3
Unobservable inputs supported by little or no market activity and significant to
the fair value of the assets or liabilities.
Recurring Measurements
The following list presents the assets and liabilities recognized in the accompanying
consolidated statements of financial condition
measured at fair value on a recurring basis and the level within the fair value
hierarchy in which the fair value measurements fall at
December 31, 2022 and 2021:
Fair Value Description
Valuation
Hierarchy
Level
Where Fair Value
Balance Can Be
Found
Available-for-
sale securities
and equity
security
Where quoted market prices are available in an active market, securities
are classified within Level 1 of the valuation hierarchy. If quoted market
prices are not available, then fair values are estimated by using quoted
prices of securities with similar characteristics or independent asset
pricing services and pricing models, the inputs of which are market-based
or independently sourced market parameters, including, but not
limited
to, yield curves, interest rates, volatilities, prepayments, defaults,
cumulative loss projections and cash flows.
Level 2
Note 3: Securities
Derivatives
Fair value of the interest rate swaps is obtained from independent pricing
services based on quoted market prices for similar derivative contracts.
Level 2
Note 8: Derivatives
Nonrecurring Measurements
The following tables present the fair value measurement of assets measured
at fair value on a nonrecurring basis and the level within
the fair value hierarchy in which the fair value measurements fall:
December 31, 2022
Fair Value Measurements Using
Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs
(Level 3)
(Dollars in thousands)
Collateral-dependent impaired loans
$
8,728
$
-
$
-
$
8,728
Foreclosed assets held-for-sale
$
1,745
$
-
$
-
$
1,745
December 31, 2021
Fair Value Measurements Using
Fair Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Unobservable
Inputs (Level 3)
(Dollars in thousands)
Collateral-dependent impaired loans
$
38,046
$
-
$
-
$
38,046
Foreclosed assets held-for-sale
$
1,148
$
-
$
-
$
1,148
Following is a description of the valuation methodologies and inputs used for
assets measured at fair value on a nonrecurring basis
and recognized in the accompanying consolidated statements of financial
condition,
as well as the general classification of such assets
pursuant to the valuation hierarchy. For assets classified within Level 3 of
the fair value hierarchy, the process used to develop the reported
fair value is described below.
Collateral-Dependent Impaired Loans, Net of ACL - The estimated fair value of collateral-dependent loans is based on the appraised fair
value of the collateral, less estimated cost to sell. If the fair value of the collateral is below the loan’s
amortized cost, the ACL is netted
against the loan balance. Collateral-dependent loans are classified within
Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining
fair value and then considers other factors
and events in the environment that may affect the fair value.
Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers
maintained by management. The appraised values are reduced by discounts to consider
lack of marketability and estimated cost to sell if
repayment or satisfaction of the loan is dependent on the sale of the collateral.
Foreclosed Assets Held-for-Sale - The fair value of foreclosed assets held-for-sale is based on the appraised fair value of the collateral, less
estimated cost to sell.
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable
inputs used in nonrecurring Level 3 fair value
measurements at December 31, 2022 and 2021:
December 31, 2022
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
Collateral-dependent impaired
loans
$
8,728
Market comparable properties
Marketability discount
% -
%
(13%)
Foreclosed assets held-for-sale
$
1,745
Market comparable properties
Marketability discount
10%
(10%)
December 31, 2021
Fair Value
Valuation Techniques
Unobservable
Inputs
Range
(Weighted Average)
(Dollars in thousands)
Collateral-dependent impaired
loans
$
38,046
Market comparable properties
Marketability discount
% -
%
(26%)
Foreclosed assets held-for-sale
$
1,148
Market comparable properties
Marketability discount
10%
(10%)
The following tables present the estimated fair values of the Company’s financial
instruments at December 31, 2022 and 2021:
December 31, 2022
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
300,138
$
300,138
$
-
$
-
Available-for-sale securities
769,641
-
686,901
-
Loans, net of ACL
5,310,954
-
-
5,307,607
Restricted equity securities
12,536
-
-
12,536
Interest receivable
29,507
-
29,507
-
Equity securities
2,870
-
-
2,870
Derivative assets
11,038
-
11,038
-
Financial Liabilities
Deposits
$
5,651,308
$
1,400,260
$
-
$
4,142,673
Federal funds purchased and repurchase agreements
74,968
-
74,968
-
Federal Home Loan Bank advances
143,143
-
135,086
-
Other borrowings
35,457
-
36,529
-
Interest payable
5,713
-
5,713
-
Derivative liabilities
16,442
-
16,442
-
December 31, 2021
Carrying
Fair Value Measurements
Amount
Level 1
Level 2
Level 3
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
482,727
$
482,727
$
-
$
-
Available-for-sale securities
745,969
-
745,969
-
Loans, net of allowance for loan losses
4,197,838
-
-
4,178,268
Restricted equity securities
11,927
-
-
11,927
Interest receivable
16,023
-
16,023
-
Equity securities
2,642
-
2,209
Derivative assets
11,308
-
11,308
-
Financial Liabilities
Deposits
$
4,683,597
$
1,163,224
$
-
$
3,482,218
Federal Home Loan Bank advances
236,600
-
241,981
-
Other borrowings
1,009
-
2,318
-
Interest payable
1,336
-
1,336
-
Derivative liabilities
11,887
-
11,887
-
Note 21:
Commitments and Credit Risk
The Company had the following commitments at December 31,
2022 and 2021:
December 31, 2022
December 31, 2021
(Dollars in thousands)
Commitments to originate loans
$
134,961
$
118,651
Standby letters of credit
66,889
51,114
Unfunded commitments under lines of credit
2,705,730
1,768,231
Future lease commitments
1,888
11,100
Commitment related to investment fund
3,403
2,067
Total
$
2,912,871
$
1,951,163
Commitments to Originate Loans
Commitments to originate loans are agreements to lend to a customer as long
as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since a
portion of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each customer’s creditworthiness is evaluated on a case-by-case
basis. The amount of collateral obtained, if deemed necessary,
is based on management’s credit evaluation of the counterparty. Collateral held
varies, but may include accounts receivable, inventory,
property, plant and equipment, commercial real estate and residential and
multifamily real estate.
Standby Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by
the Company to guarantee the performance of a
customer to a third-party. Financial standby letters of credit are primarily
issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. Performance
standby letters of credit are issued to guarantee
performance of certain clients under nonfinancial contractual obligations. The
credit risk involved in issuing standby letters of credit is
essentially the same as that involved in extending loans to clients. Fees for letters of credit are
initially recorded by the Company as deferred
revenue and are included in earnings at the termination of the respective agreements.
Should the Company be obligated to perform under the standby letters of
credit, the Company may seek recourse from the customer
for reimbursement of amounts paid.
Lines of Credit
Lines of credit are agreements to lend to a client as long as there is no violation
of any condition established in the contract. Lines of
credit generally have fixed expiration dates. Since a portion of the line
may expire without being drawn upon, the total unused lines do not
necessarily represent future cash requirements. Each customer’s creditworthiness
is evaluated on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, is based on management’s credit evaluation
of the counterparty.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, commercial real estate and
residential real estate. Management uses the same credit policies in granting
lines of credit as it does for on-balance sheet instruments.
Commitments related to Investment Fund
During 2022, the Company entered into a subscription agreement with two third
parties to invest up to $
3.5
million in investment
funds designed to help accelerate technology adoption at community banks.
Lease Commitments
The Company entered into a lease agreement with a third party for office space
located in Fort Worth, Texas, which is expected to
commence in the second quarter of 2023. The initial lease term is
10.8
years with
one
,
seven year
renewal option.
Note 22:
Parent Company Condensed Financial Statements
The following are the condensed financial statements of CrossFirst Bankshares,
Inc. (Parent only) for the periods indicated:
Condensed Statements of Financial Condition
Year Ended December 31,
(Dollars in thousands)
Assets
Investment in consolidated subsidiaries
Banks
$
608,545
$
646,027
Equity method investments
2,597
Cash
4,457
23,368
Other assets
8,776
1,596
Total assets
$
624,375
$
671,424
Liabilities and stockholders' equity
Other borrowings
$
5,000
$
-
Trust preferred securities, net
1,061
1,009
Other liabilities
9,715
2,842
Total liabilities
15,776
3,851
Stockholders' equity
Common stock
Treasury stock at cost
(64,127)
(28,347)
Additional paid-in capital
530,658
526,806
Retained earnings
206,095
147,099
Accumulated other comprehensive (loss) income
(64,557)
21,489
Total stockholders' equity
608,599
667,573
Total liabilities and stockholders' equity
$
624,375
$
671,424
Condensed Statements of Operations
For the Year Ended December 31,
(Dollars in thousands)
Income
Equity in undistributed earnings of subsidiaries
$
30,267
$
71,528
$
13,682
Distributions from subsidiaries
32,847
-
-
Management fees charged to subsidiaries
8,520
8,520
8,520
Other
(18)
Total income
71,787
80,050
22,184
Expense
Salaries and employee benefits
4,272
6,111
5,143
Occupancy, net
Other
5,893
4,718
4,220
Total expense
10,574
11,232
9,768
Income tax benefit
(386)
(595)
(185)
Net income
$
61,599
$
69,413
$
12,601
Condensed Statements of Cash Flows
For the Year Ended December 31,
(Dollars in thousands)
Operating Activities
Net income
$
61,599
$
69,413
$
12,601
Adjustments to reconcile net income to net cash provided by operating
activities:
Earnings of consolidated subsidiaries
(30,267)
(71,528)
(13,682)
Share-based incentive compensation
1,511
2,332
1,917
Other adjustments
(256)
(155)
(412)
Net cash provided by operating activities
32,587
Investing Activities
Decrease in investment in subsidiaries
(18,000)
-
Increase in equity investments
(2,164)
(433)
-
Net cash (used in) provided by investing activities
(20,164)
(433)
Financing Activities
Proceeds from TIB line of credit
5,000
-
-
Issuance of common stock, net
Open market common share repurchases
(35,780)
(22,286)
(6,061)
Acquisition of common stock for tax withholding obligations
(929)
(860)
(1,236)
Proceeds from employee stock purchase plan
Net decrease in employee receivables
Net cash used in financing activities
(31,334)
(22,937)
(7,096)
Decrease in cash
(18,911)
(23,308)
(5,802)
Cash at beginning of year
23,368
46,676
52,478
Cash at end of year
$
4,457
$
23,368
$
46,676
Note 23.
Subsequent Events
Subsequent events have been evaluated through March 3, 2023,
which is the date the consolidated financial statements were
available to be issued.
On February 23, 2023, we filed a universal shelf registration statement on Form
S-3 with the Securities and Exchange Commission
which became effective on March 2, 2023. The shelf registration statement
is intended to provide us with financial flexibility to raise capital
from the offering of up to $
million of any combination of common stock, preferred stock, debt securities,
depositary shares, warrants,
purchase contracts, purchase units, subscription rights and units in one or multiple
offerings while the shelf registration statement is effective.

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9.
Changes in and Disagreements with
Accountants on Accounting
and Financial
Disclosure
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has
evaluated the effectiveness of the Company’s disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act, as of December 31, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer
concluded that the Company’s disclosure controls and procedures were effective
in recording, processing, summarizing and reporting, on a
timely basis, information required to be disclosed by the Company
in the reports that we file or submit under the Exchange Act as of
December 31, 2022.
Management’s Report on Internal Control over Financial Reporting
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting
as defined in Rule 13a-15(f) under the Exchange Act. Our systems of internal controls are designed under the supervision
and with the
participation of management, including our Chief Executive Officer and
Chief Financial Officer, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of our financi
al statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect all misstatements. Also,
projections of any evaluation of effectiveness as to future periods are
subject to the risk that controls may become inadequate because of
changes in conditions or that the degree of compliance with the policies or
procedures may deteriorate. In addition, given the Company’s
size, operations and footprint, lapses or deficiencies in internal controls
may occur from time to time.
On November 22, 2022, the Company completed the merger
with Central.
The Company is in the process of evaluating the existing
controls and procedures of Central and integrating Central into the
internal control over financial reporting process.
In accordance with SEC
Staff guidance permitting a company to exclude an acquired
business from management’s assessment
of the effectiveness of internal control
over financial reporting for the year in which the acquisition is completed,
the Company has excluded Central from the assessment of the
effectiveness of internal control over financial reporting
as of December 31, 2022. Operations of Central comprised 0.42% of
net income for
the year ended December 31, 2022.
The scope of management’s assessment of
the effectiveness of the design and operation of the
Company’s disclosure
controls and procedures as of December 31, 2022 includes all of the Company’s
consolidated operations except for
those disclosure
controls and procedures of Central that are included in internal control over financial
reporting.
Management assessed our internal control over financial reporting as of
December 31, 2022. This assessment was based on criteria
established in the 2013 Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on this assessment, we have concluded
that, as of December 31, 2022, our internal control over financial
reporting was effective.
Our internal control over financial reporting continues to be updated
as necessary to accommodate modifications to our business
processes and accounting procedures. There has been no change in our internal
control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2022 that has materially affected, or is reasonably
likely
to materially affect, our internal control over financial reporting.

---

ITEM 9B. OTHER INFORMATION
Item 9B.
Other Information
None.

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item regarding our directors is incorporated
by reference to the information to be set forth under
the captions “Board & Governance Matters - Proposal 1 - Election of Directors,”
“Proxy Summary and Highlights - Information Regarding
the Board and Director Nominees,” “Delinquent Section 16(a) Reports,” “Board
and Committee Structure and Operations - Committee
Matters,” “Board and Committee Structure and Operations - Board
and Committee Meetings,” and “Code of Business Conduct and Ethics”
in our proxy statement for our 2023
annual meeting of stockholders (the “2023 Proxy Statement”). The information required by
this item
regarding our executive officers is incorporated by reference to Part I of this Annual Report on Form 10-K under the
caption “Information
About our Executive Officers.”
There have been no material changes to the procedures by which security holders
may recommend nominees to our Board of
Directors since our last disclosure thereof in our 2022 proxy statement.

---

ITEM 11. EXECUTIVE COMPENSATION
Item 11.
Executive Compensation
The information required by this item regarding compensation
of executive officers and directors is incorporated by reference to the
information to be set forth under the captions (including the subcaptions
found within these captions) “Director Compensation,” “Executive
Compensation,” “Executive Compensation Tables,” and “Corporate
Governance - Other Matters - Compensation Committee Interlocks and
Insider Participation” in the 2023 Proxy Statement and
Note 17: Stock-Based Compensation
within the Notes to the Consolidated Financial
Statements.

---

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this item, other than the equity compensation
plan information presented below, is incorporated by
reference to the information to be set forth under the caption “Beneficial Ownership
of Company Common Stock” in the 2023 Proxy
Statement and
Note 17: Stock-Based Compensation
within the Notes to the Consolidated Financial Statements.
Securities Authorized for Issuance
under Equity Compensation Plans
Set forth below is information as of December 31, 2022 regarding
equity compensation plans:
Plan Category
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted average exercise
price of outstanding
options, warrants and
rights
Number of securities
remaining available for
future issuance under
equity compensation plans
Equity compensation plans
approved by stockholders
-
-
799,952
(1)
Equity compensation plans not
approved by stockholders
1,239,240
(2)
$
11.21
(3)
1,530,702
(4)
Total
1,239,240
$
11.21
2,330,654
(1)
Represents the number of securities remaining available under the Employee Stock Purchase Plan.
(2)
Includes 100,000 shares issuable upon exercise of stock appreciation rights, 80,000 shares issuable upon exercise of warrants, and 1,059,240 shares
issuable upon exercise of stock appreciation rights granted under the 2018 Omnibus Equity Incentive Plan (the "Omnibus Plan").
(3)
Represents the weighted average exercise price of outstanding stock appreciation rights and warrants. Includes the weighted average exercise price of
$28.50 for stock appreciation rights, $5.00 for shares issuable upon exercise of warrants and $10.05 for stock appreciation rights granted under the
Omnibus Plan.
(4)
Available shares can be granted in the form of stock appreciation rights, options, restricted stock, restricted stock units, or performance awards. The
number of securities remaining available under the Omnibus Plan was 1,530,702.
The Omnibus Plan was established to promote the Company’s long-term
financial success by providing a means for the Company to
attract and retain individuals who can and do contribute to the Company’s
success and profitability. All employees and directors of, and
certain other service providers to, the Company and its affiliates are eligible to become
participants in the 2018 Equity Incentive Plan. The
Compensation Committee will determine the specific individuals who
will be granted awards under the Omnibus Plan and the type and
amount of any such awards and may permit awards to be granted or transferred
to certain entities related to participants. Pursuant to the
Omnibus Plan, the Compensation Committee is allowed to grant awards
to eligible persons in the form of non-qualified stock options, stock
appreciation rights, restricted stock, restricted stock units, performance
shares, performance units and other stock-based awards. Up to
2,600,000 shares of common stock are reserved for issuance under the Omnibus
Plan; however, any shares issued pursuant to or subject to a
Legacy Award do not count against the maximum share limit under the Omnibus Plan. A non-employee director may not be granted any
award under the Omnibus Plan which is denominated in shares in any one calendar
year for which the number of shares granted exceeds a
number equal to the quotient of $200 thousand divided by the grant date fair
value of the award (determined under applicable accounting
principles), rounded down to the nearest whole share. Awards vest, become exercisable and contain such other terms and conditions
as
determined by the Compensation Committee and set forth in the individual
agreements with the participants receiving the awards. The
Omnibus Plan enables the Compensation Committee to set specific performance
criteria that must be met before an award vests under the
Omnibus Plan.
See
Note 17: Stock-Based Compensation
for additional information about the Omnibus Plan.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13.
Certain Relationships and Related Transactions, and Director
Independence
The information required by this item is incorporated by reference to
the information to be set forth under the captions “Policies and
Procedures Regarding Related Person Transactions,” “Certain Transactions,” “Corporate
Governance - Director Nominations, Skills and
Qualifications - Director Independence,” and “Board and Committee
Structure and Operations - Committee Matters” in the 2023 Proxy
Statement.

---

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14.
Principal Accountant
Fees and Services
The information required by this item is incorporated by reference to
the information to be set forth under the caption “Audit
Matters - Independent Registered Public Accounting Firm Fees” and “Audit Matters - Policy Regarding Pre-Approval
of Independent
Registered Public Accounting Firm Services” in the 2023 Proxy Statement.
The independent Registered Public Accounting Firm is
FORVIS, LLP
(Public Company Accounting Oversight Board Firm ID No.
) located in
Kansas City, Missouri
Part IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15.
Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
The following financial statements of CrossFirst Bankshares, Inc. and its subsidiaries, and
the auditor’s report thereon are filed as
part of this report under Item 8. Financial Statements and Supplementary
Data:
Page Number
Report of FORVIS, LLP Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules:
All financial statement schedules for CrossFirst Bankshares, Inc. and its subsidiaries
have been included in this Form 10-K in the
consolidated financial statements or the related footnotes, or they are
either inapplicable or not required.
(a) (3) Exhibits
Incorporated by Reference
Exhibit
Number
Exhibit Description
Form
Exhibit
Filing
Date/Period End
Date
3.1
Articles of Incorporation of CrossFirst Bankshares, Inc.
S-1
3.1
July 18, 2019
3.2
Amendment to Articles of Incorporation of CrossFirst Bankshares, Inc.
S-1
3.2
July 18, 2019
3.3
Bylaws of CrossFirst Bankshares, Inc.
S-1
3.3
July 18, 2019
4.1
Specimen Common Stock Certificate
S-1
4.1
July 18, 2019
4.2
Form of Warrant Agreement
S-1/A
4.2
July 29, 2019
4.3
Description of Securities
10-K
4.3
March 10, 2020
10.1
Employment Agreement with Mike Maddox dated
June 1, 2020
†
10-Q
10.1
August 12, 2020
10.2
Employment Agreement with Benjamin R. Clouse, dated July 12, 2021†
10-Q
10.1
November 2, 2021
10.3
Employment Agreement with Amy Fauss dated July 29, 2016†
S-1
10.8
July 18, 2019
10.4
First Amendment to Employment Agreement with Amy Fauss dated
March 15, 2019†
S-1
10.9
July 18, 2019
10.5
Amended and Restated Employment Agreement with Randy Rapp, dated
effective July 1, 2022†
10-Q
10.1
August 3, 2022
10.6
2018 Omnibus Equity Incentive Plan†
S-1
10.15
July 18, 2019
10.7
Form of Legacy RSU - New Market Founders Award†
S-1
10.16
July 18, 2019
10.8
Form of Legacy EIP 2018 RSU Award Agreement†
S-1
10.17
July 18, 2019
10.9
Form of Legacy SAR Award Agreement†
S-1
10.18
July 18, 2019
10.10
Form of EEIP Legacy RSU Award Agreement†
S-1
10.19
July 18, 2019
10.11
Form of RSU Award Agreement†
S-1
10.20
July 18, 2019
10.12
Form of 2019 RSU Award Agreement†
S-1
10.21
July 18, 2019
10.13*
Omnibus Plan - Form of Time-Based RSU Award Agreement (02.23)†
10.14
Form of Performance Share Award Agreement
†
10-K
10.18
February 28, 2022
10.15*
Omnibus Plan - Form of Performance-Based RSU Award Agreement
(02.23)†
10.16
Form of Director Restricted Stock Award†
S-1
10.23
July 18, 2019
10.17*
Omnibus Plan - Director Restricted Stock Award (02.23)
†
10.18
Form of Indemnification Agreement†
S-1
10.24
July 18, 2019
10.19
Director Deferred Fee Program†
S-1
10.25
July 18, 2019
10.20*
Omnibus Plan - SAR Award Agreement†
10.21
Annual Incentive Plan†
10-Q
10.1
May 14, 2020
10.22
Employment Agreement with Steve Peterson dated July 1, 2020†
10-Q
10.2
August 12, 2020
10.23
Senior Executive Severance Plan†
10-Q
10.3
August 12, 2020
10.24
Employment Agreement with Jana D. Merfen Dated January 27, 2021†
10-Q
10.1
May 6, 2021
21.1*
Subsidiaries of CrossFirst Bankshares, Inc.
23.1*
Consent of Forvis, LLP
31.1*
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of
the Exchange act, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2*
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of
the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002Oxley Act of 2002
32.1**
Certification Pursuant to 18 U.S.C. Section 1350, as adopted to Section
906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document - the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema
101.CAL*
Inline XBRL Extension Calculation Linkbase
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase
104*
Cover Page Interactive Data File (formatted in Inline XBRL and contained
in Exhibit 101)
* Filed Herewith
**Furnished Herewith
† Indicates a management contract or compensatory plan