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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 001-39028
CROSSFIRST BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
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| Kansas | | 26-3212879 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 11440 Tomahawk Creek Parkway | | |
| Leawood, | | KS | | 66211 |
| (Address of principal executive offices) | | (Zip Code) |
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(913) 312-6822
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common Stock, par value $0.01 per share | | CFB | | The Nasdaq Stock Market LLC |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | | ☐ | | Accelerated filer | | ☒ |
| Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| Emerging growth company | | ☒ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 5, 2021, the registrant had 51,580,761 shares of common stock, par value $0.01, outstanding.
CrossFirst Bankshares, Inc.
Form 10-Q for the Quarter Ended March 31, 2021
Index
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| Part I. Financial Information | |
| Item 1. Financial Statements | |
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| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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| Part II. Other Information | |
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| Signatures | |
Forward-Looking Information
This report may contain forward-looking statements that reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “strive,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature.
These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Such possible events or factors include: risks associated with the current outbreak of the novel coronavirus, or the COVID-19 pandemic, changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, governmental legislation and regulation, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company’s market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, and such other factors as discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021, any subsequent quarterly report on Form 10-Q as well as in our other filings with the SEC.
We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
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| March 31, 2021 | | December 31, 2020 |
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| (Unaudited) | | |
| (Dollars in thousands) |
| Assets | | | |
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| Cash and cash equivalents | $ | 630,787 | | | $ | 408,810 | |
| Available-for-sale securities - taxable | 192,031 | | | 177,238 | |
| Available-for-sale securities - tax-exempt | 493,423 | | | 477,350 | |
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Loans, net of allowance for loan losses of $74,551 and $75,295 at March 31, 2021 and December 31, 2020, respectively | 4,434,049 | | | 4,366,602 | |
| Premises and equipment, net | 69,270 | | | 70,509 | |
| Restricted equity securities | 14,080 | | | 15,543 | |
| Interest receivable | 17,987 | | | 17,236 | |
| Foreclosed assets held for sale | 2,347 | | | 2,347 | |
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| Bank-owned life insurance | 67,914 | | | 67,498 | |
| Other | 76,186 | | | 56,170 | |
| Total assets | $ | 5,998,074 | | | $ | 5,659,303 | |
| Liabilities and stockholders’ equity | | | |
| Deposits | | | |
| Noninterest-bearing | $ | 794,559 | | | $ | 718,459 | |
| Savings, NOW and money market | 3,325,220 | | | 2,932,799 | |
| Time | 931,791 | | | 1,043,482 | |
| Total deposits | 5,051,570 | | | 4,694,740 | |
| Federal funds purchased and repurchase agreements | 3,294 | | | 2,306 | |
| Federal Home Loan Bank advances | 283,100 | | | 293,100 | |
| | | |
| Other borrowings | 974 | | | 963 | |
| Interest payable and other liabilities | 30,302 | | | 43,766 | |
| Total liabilities | 5,369,240 | | | 5,034,875 | |
| Stockholders’ equity | | | |
| | | |
| | | |
| | | |
| | | |
Common stock, $0.01 par value: | | | |
| | | |
| | | |
authorized - 200,000,000 shares, issued - 52,376,779 and 52,289,129 shares at March 31, 2021 and December 31, 2020, respectively | 523 | | | 523 | |
| Treasury stock, at cost: | | | |
698,110 and 609,613 shares held at March 31, 2021 and December 31, 2020, respectively | (7,113) | | | (6,061) | |
| Additional paid-in capital | 523,156 | | | 522,911 | |
| Retained earnings | 89,722 | | | 77,652 | |
| | | |
| Accumulated other comprehensive income | 22,546 | | | 29,403 | |
| Total stockholders’ equity | 628,834 | | | 624,428 | |
| Total liabilities and stockholders’ equity | $ | 5,998,074 | | | $ | 5,659,303 | |
See Notes to Consolidated Financial Statements (unaudited)
4
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | | |
| (Dollars in thousands except per share data) |
| Interest Income | | | | | | | |
| Loans, including fees | $ | 43,758 | | | $ | 48,339 | | | | | |
| | | | | | | |
| Available-for-sale securities - taxable | 751 | | | 1,774 | | | | | |
| Available-for-sale securities - tax-exempt | 3,351 | | | 3,312 | | | | | |
| Deposits with financial institutions | 128 | | | 491 | | | | | |
| Dividends on bank stocks | 165 | | | 292 | | | | | |
| | | | | | | |
| Total interest income | 48,153 | | | 54,208 | | | | | |
| Interest Expense | | | | | | | |
| Deposits | 5,728 | | | 14,272 | | | | | |
| Fed funds purchased and repurchase agreements | 1 | | | 62 | | | | | |
| Federal Home Loan Bank Advances | 1,283 | | | 1,611 | | | | | |
| Other borrowings | 24 | | | 35 | | | | | |
| Total interest expense | 7,036 | | | 15,980 | | | | | |
| Net Interest Income | 41,117 | | | 38,228 | | | | | |
| Provision for Loan Losses | 7,500 | | | 13,950 | | | | | |
| Net Interest Income after Provision for Loan Losses | 33,617 | | | 24,278 | | | | | |
| Non-Interest Income | | | | | | | |
| Service charges and fees on customer accounts | 957 | | | 508 | | | | | |
| Realized gains on available-for-sale securities | 10 | | | 393 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Income from bank-owned life insurance | 416 | | | 456 | | | | | |
| Swap fees and credit valuation adjustments, net | 155 | | | (9) | | | | | |
| ATM and credit card interchange income | 2,328 | | | 485 | | | | | |
| Other non-interest income | 278 | | | 254 | | | | | |
| Total non-interest income | 4,144 | | | 2,087 | | | | | |
| Non-Interest Expense | | | | | | | |
| Salaries and employee benefits | 13,553 | | | 14,390 | | | | | |
| Occupancy | 2,494 | | | 2,085 | | | | | |
| Professional fees | 782 | | | 671 | | | | | |
| Deposit insurance premiums | 1,151 | | | 1,016 | | | | | |
| Data processing | 716 | | | 692 | | | | | |
| Advertising | 303 | | | 500 | | | | | |
| Software and communication | 1,065 | | | 876 | | | | | |
| | | | | | | |
| Foreclosed assets, net | 50 | | | 10 | | | | | |
| | | | | | | |
| Other non-interest expense | 2,704 | | | 1,975 | | | | | |
| Total non-interest expense | 22,818 | | | 22,215 | | | | | |
| Net Income Before Taxes | 14,943 | | | 4,150 | | | | | |
| Income tax expense | 2,908 | | | 293 | | | | | |
| Net Income | $ | 12,035 | | | $ | 3,857 | | | | | |
| Basic Earnings Per Share | $ | 0.23 | | | $ | 0.07 | | | | | |
| Diluted Earnings Per Share | $ | 0.23 | | | $ | 0.07 | | | | | |
See Notes to Consolidated Financial Statements (unaudited)
5
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | | |
| (Dollars in thousands) |
| Net Income | $ | 12,035 | | | $ | 3,857 | | | | | |
| Other Comprehensive Income (Loss) | | | | | | | |
| Unrealized gain (loss) on available-for-sale securities | (9,070) | | | 8,532 | | | | | |
| Less: income tax expense (benefit) | (2,221) | | | 2,084 | | | | | |
Unrealized gain (loss) on available-for-sale securities, net of income tax | (6,849) | | | 6,448 | | | | | |
Reclassification adjustment for realized gains included in income | 10 | | | 393 | | | | | |
| Less: income tax | 2 | | | 96 | | | | | |
Less: reclassification adjustment for realized gains included in income, net of income tax | 8 | | | 297 | | | | | |
| Other comprehensive income (loss) | (6,857) | | | 6,151 | | | | | |
| Comprehensive Income | $ | 5,178 | | | $ | 10,008 | | | | | |
See Notes to Consolidated Financial Statements (unaudited)
6
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | | | Accumulated Other Comprehensive Income | | Treasury Stock | | Total |
| | | | | Shares | | Amount | | | | | | | |
| | | | | (Dollars in thousands) |
Balance at December 31, 2019 | | | | | 51,969,203 | | | $ | 520 | | | $ | 519,870 | | | $ | 64,803 | | | | | $ | 16,451 | | | $ | — | | | $ | 601,644 | |
| Net income | | | | | — | | | — | | | — | | | 3,857 | | | | | — | | | — | | | 3,857 | |
Change in unrealized appreciation on available-for-sale securities | | | | | — | | | — | | | — | | | — | | | | | 6,151 | | | — | | | 6,151 | |
| | | | | | | | | | | | | | | | | | | |
| Issuance of shares from equity-based awards | | | | | 128,859 | | | 1 | | | (671) | | | — | | | | | — | | | — | | | (670) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Employee receivables from sale of stock | | | | | — | | | — | | | 1 | | | 29 | | | | | — | | | — | | | 30 | |
| Stock-based compensation | | | | | — | | | — | | | 934 | | | — | | | | | — | | | — | | | 934 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2020 | | | | | 52,098,062 | | | $ | 521 | | | $ | 520,134 | | | $ | 68,689 | | | | | $ | 22,602 | | | $ | — | | | $ | 611,946 | |
| | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | | | Accumulated Other Comprehensive Income | | Treasury Stock | | Total |
| | | | | Shares | | Amount | | | | | | | |
| | | | | (Dollars in thousands) |
Balance at December 31, 2020 | | | | | 51,679,516 | | | $ | 523 | | | $ | 522,911 | | | $ | 77,652 | | | | | $ | 29,403 | | | $ | (6,061) | | | $ | 624,428 | |
| Net income | | | | | — | | | — | | | — | | | 12,035 | | | | | — | | | — | | | 12,035 | |
| | | | | | | | | | | | | | | | | | | |
Change in unrealized depreciation on available-for-sale securities | | | | | — | | | — | | | — | | | — | | | | | (6,857) | | | — | | | (6,857) | |
| | | | | | | | | | | | | | | | | | | |
| Issuance of shares from equity-based awards | | | | | 87,650 | | | — | | | (404) | | | — | | | | | — | | | — | | | (404) | |
| Open market common share repurchases | | | | | (88,497) | | | — | | | — | | | — | | | | | — | | | (1,052) | | | (1,052) | |
| | | | | | | | | | | | | | | | | | | |
| Employee receivables from sale of stock | | | | | — | | | — | | | — | | | 35 | | | | | — | | | — | | | 35 | |
| Stock-based compensation | | | | | — | | | — | | | 649 | | | — | | | | | — | | | — | | | 649 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2021 | | | | | 51,678,669 | | | $ | 523 | | | $ | 523,156 | | | $ | 89,722 | | | | | $ | 22,546 | | | $ | (7,113) | | | $ | 628,834 | |
| | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements (unaudited)
7
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
| | | | | | | | | | | |
| Three Months Ended |
| March 31, |
| 2021 | | 2020 |
| (Dollars in thousands) |
| Operating Activities | | | |
| Net income | $ | 12,035 | | | $ | 3,857 | |
| Items not requiring (providing) cash | | | |
| Depreciation and amortization | 1,375 | | | 1,295 | |
| Provision for loan losses | 7,500 | | | 13,950 | |
| | | |
| Accretion of discounts and amortization of premiums on securities | 1,310 | | | 1,473 | |
| Equity based compensation | 649 | | | 934 | |
| | | |
| | | |
| | | |
| Deferred income taxes | 1,824 | | | 2,881 | |
| | | |
| | | |
| Net realized gains on available-for-sale securities | (10) | | | (393) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Changes in | | | |
| | | |
| | | |
| Interest receivable | (751) | | | (1,242) | |
| Other assets | (28,730) | | | (717) | |
| Other liabilities | (4,937) | | | (9,368) | |
| Net cash provided by (used in) operating activities | (9,735) | | | 12,670 | |
| Investing Activities | | | |
| Net change in loans | (74,947) | | | (169,595) | |
| Purchases of available-for-sale securities | (74,575) | | | (11,861) | |
| Proceeds from maturities of available-for-sale securities | 33,329 | | | 21,528 | |
| Proceeds from sale of available-for-sale securities | — | | | 3,841 | |
| | | |
| Purchase of premises and equipment | (118) | | | (331) | |
| | | |
| Purchase of restricted equity securities | — | | | (970) | |
| | | |
| Proceeds from sale of restricted equity securities | 1,626 | | | — | |
| | | |
| Net cash used in investing activities | (114,685) | | | (157,388) | |
| | | |
| |
| | | |
| | | |
| Financing Activities | | | |
| | | |
Net increase in demand deposits, savings, NOW and money market accounts | 468,521 | | | 185,747 | |
| Net decrease in time deposits | (111,691) | | | (136,684) | |
| | | |
| Net increase in fed funds purchased and repurchase agreements | 988 | | | 24,025 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Proceeds from Federal Home Loan Bank advances | — | | | 70,000 | |
| Repayment of Federal Home Loan Bank advances | (10,000) | | | (26,063) | |
| | | |
| | | |
| | | |
| | | |
| Issuance of common shares, net of issuance cost | — | | | 1 | |
| | | |
| | | |
| Repurchase of common stock | (1,052) | | | — | |
| Acquisition of common stock for tax withholding obligations | (404) | | | (671) | |
| Net decrease in employee receivables | 35 | | | 30 | |
| | | |
| Net cash provided by financing activities | 346,397 | | | 116,385 | |
| Increase (Decrease) in Cash and Cash Equivalents | 221,977 | | | (28,333) | |
| Cash and Cash Equivalents, Beginning of Period | 408,810 | | | 187,320 | |
| Cash and Cash Equivalents, End of Period | $ | 630,787 | | | $ | 158,987 | |
| | | |
| Supplemental Cash Flows Information | | | |
| Interest paid | $ | 7,287 | | | $ | 17,199 | |
| Income taxes paid | $ | 130 | | | $ | — | |
| | | |
| | | |
| | | |
See Notes to Consolidated Financial Statements (unaudited)
8
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Note 1:Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
CrossFirst Bankshares, Inc. (the “Company”) is a bank holding company whose principal activities are the ownership and management of its wholly-owned subsidiary, CrossFirst Bank (the “Bank”). In addition, the Bank has three subsidiaries including CrossFirst Investments, Inc. (“CFI”) that holds investments in marketable securities, CFBSA I, LLC that holds foreclosed assets and CFBSA II, LLC that holds foreclosed assets.
Basis of Presentation
The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”). The consolidated financial statements include the accounts of the Company, the Bank, CFI, CFBSA I, LLC and CFBSA II, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
The consolidated interim financial statements are unaudited and certain information and footnote disclosures presented in accordance with GAAP have been condensed or omitted and should be read in conjunction with the Company’s consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2021.
In the opinion of management, the interim financial statements include all adjustments which are of a normal, recurring nature necessary for the fair presentation of the financial position, results of operations, and cash flows of the Company and the disclosures made are adequate to make the interim financial information not misleading. The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Form 10-Q adopted by the SEC.
No significant changes in the accounting policies of the Company occurred since December 31, 2020, the most recent date financial statements were provided within the Company’s 2020 Form 10-K. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for a full year or any future period.
Use of Estimates
The Company identified accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of the Company’s financial statements to those judgments and assumptions, are critical to an understanding of the Company’s financial condition and results of operations. Actual results could differ from those estimates. In particular, the novel coronavirus (“COVID-19”) pandemic and resulting impacts to economic conditions, as well as adverse impacts to the Company’s operations, may impact future estimates. The allowance for loan losses, deferred tax asset, and fair value of financial instruments are particularly susceptible to significant change.
Cash Equivalents
The Company had $541 million of cash and cash equivalents at the Federal Reserve Bank of Kansas City as of March 31, 2021. The reserve required at March 31, 2021 was $0.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
The CARES Act gave financial institutions the right to elect to suspend GAAP principles and regulatory determinations for loan modifications relating to COVID-19 that would otherwise be categorized as TDRs from March 1, 2020, through December 31, 2020. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law, which extended the period during which the Company may suspend GAAP principles and regulatory determinations for loan modifications relating to COVID-19 that would otherwise be categorized as TDRs through January 1, 2022 or 60 days after the date when the national emergency concerning COVID-19 terminates. The Company elected to apply the guidance starting in the first quarter of 2020.
Changes Affecting Comparability
Beginning with the quarter ended March 31, 2021, the Company consolidated the “Goodwill and other intangible assets, net” into “other assets” within the Consolidated Balance Sheets. The consolidation was due to the immateriality of the remaining intangible assets. The change had no impact on net income.
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
For the quarter ended March 31, 2021, the Company consolidated “equipment costs, other asset depreciation and amortization” into “other noninterest expense” within the Consolidated Statements of Income. In addition, the Company broke out “foreclosed assets, net” that was previously consolidated. As a result, changes within the Consolidated Statements of Income in the prior periods were made to conform to the current period presentation. The changes: (i) consolidate lower balance line items or (ii) provide additional detail about the Company’s operations. The changes had no impact on net income.
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.
Recent Accounting Pronouncements
The following table provides information about Accounting Standard Updates (“ASUs”) the Company anticipates to adopt in the future:
| | | | | | | | | | | | | | | | | | | | |
| Standard | | Anticipated Date of Adoption | | Description | | Effect on Financial Statements or Other Significant Matters |
ASU 2016-13
Financial Instruments-Credit Losses | | If the Company maintains its EGC status, the Company is not required to implement this standard until January 2023. The Company anticipates an adoption date of January 2022. | | Requires an entity to utilize a new impairment model known as the current expected credit loss model to estimate its lifetime expected credit loss and record an allowance that, when deducted from amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. | | The Company established a committee of individuals from applicable departments to oversee the implementation process. The Company completed the third-party software implementation phase that included data capture and portfolio segmentation amongst other items.
The Company completed parallel runs in 2019. During the period ended December 31, 2020, the Company continued to perform parallel runs using 2020 data and continued to recalibrate inputs as necessary. The Company is evaluating the internal control changes that will be necessary to transition to the third-party platform and third-party testing is anticipated later in 2021.
At this time, an estimate of the impact cannot be established as the Company continues to evaluate the inputs into the model. The actual impact could be significantly affected by the composition, characteristics, and quality of the underlying loan portfolio at the time of adoption. |
ASU 2016-02
Leases (Topic 842) | | The Company expects to implement this standard on January 1, 2022, unless the Company loses its EGC status during 2021. If EGC status changes, the Company would therefore be required to implement the ASU as of the beginning of 2021. | | Requires lessees and lessors to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements.
The update requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach with the option to elect certain practical expedients. The update will also increase disclosures around leases, including qualitative and specific quantitative measures. | | The Company expects to apply the update as of the beginning of the period of adoption and the Company does not plan to restate comparative periods. The Company expects to elect certain optional practical expedients.
The Company gathered all potential lease and embedded lease agreements and is evaluating the applicability and impact to the financial statements.
The Company’s current operating leases relate primarily to four branch locations. Based on the current leases, the Company anticipates recognizing a lease liability and related right-to-use asset on its balance sheet, with an immaterial impact to its income statement compared to the current lease accounting model. However, the ultimate impact of the standard will depend on the Company's lease portfolio as of the adoption date. |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Note 2:Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | | |
| (Dollars in thousands except per share data) |
| Earnings per Share | | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income available to common stockholders | $ | 12,035 | | | $ | 3,857 | | | | | |
Weighted average common shares | 51,657,204 | | | 52,071,484 | | | | | |
| Earnings per share | $ | 0.23 | | | $ | 0.07 | | | | | |
| Dilutive Earnings Per Share | | | | | | | |
| | | | | | | |
| | | | | | | |
| Net income available to common stockholders | $ | 12,035 | | | $ | 3,857 | | | | | |
Weighted average common shares | 51,657,204 | | | 52,071,484 | | | | | |
Effect of dilutive shares | 724,270 | | | 588,786 | | | | | |
Weighted average dilutive common shares | 52,381,474 | | | 52,660,270 | | | | | |
| Diluted earnings per share | $ | 0.23 | | | $ | 0.07 | | | | | |
| | | | | | | |
Stock-based awards not included because to do so would be antidilutive | 669,112 | | | 905,406 | | | | | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Note 3:Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of period end available-for-sale securities consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Approximate Fair Value |
| (Dollars in thousands) |
| Available-for-sale securities | | | | | | | |
| Mortgage-backed - GSE residential | $ | 138,231 | | | $ | 2,912 | | | $ | 1,464 | | | $ | 139,679 | |
Collateralized mortgage obligations - GSE residential | 38,206 | | | 785 | | | 26 | | | 38,965 | |
| State and political subdivisions | 474,912 | | | 28,517 | | | 862 | | | 502,567 | |
| Corporate bonds | 4,251 | | | 74 | | | 82 | | | 4,243 | |
| Total available-for-sale securities | $ | 655,600 | | | $ | 32,288 | | | $ | 2,434 | | | $ | 685,454 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Approximate Fair Value |
| (Dollars in thousands) |
| Available-for-sale securities | | | | | | | |
| Mortgage-backed - GSE residential | $ | 104,839 | | | $ | 4,277 | | | $ | — | | | $ | 109,116 | |
Collateralized mortgage obligations - GSE residential | 52,070 | | | 984 | | | 42 | | | 53,012 | |
| State and political subdivisions | 454,486 | | | 33,642 | | | 31 | | | 488,097 | |
| Corporate bonds | 4,259 | | | 104 | | | — | | | 4,363 | |
| Total available-for-sale securities | $ | 615,654 | | | $ | 39,007 | | | $ | 73 | | | $ | 654,588 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
The amortized cost and fair value of available-for-sale securities at March 31, 2021, by contractual maturity, are shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 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 | $ | — | | | $ | 48 | | | $ | 181 | | | $ | 138,002 | | | $ | 138,231 | | |
| Estimated fair value | $ | — | | | $ | 50 | | | $ | 193 | | | $ | 139,436 | | | $ | 139,679 | | |
Weighted average yield(2) | — | % | | 4.60 | % | | 3.91 | % | | 1.72 | % | | 1.72 | % | |
Collateralized mortgage obligations - GSE residential(1) | | | | | | | | | | |
| Amortized cost | $ | — | | | $ | — | | | $ | 2,469 | | | $ | 35,737 | | | $ | 38,206 | | |
| Estimated fair value | $ | — | | | $ | — | | | $ | 2,645 | | | $ | 36,320 | | | $ | 38,965 | | |
Weighted average yield(2) | — | % | | — | % | | 2.75 | % | | 1.59 | % | | 1.66 | % | |
| State and political subdivisions | | | | | | | | | | |
| Amortized cost | $ | 652 | | | $ | 5,947 | | | $ | 65,518 | | | $ | 402,795 | | | $ | 474,912 | | |
| Estimated fair value | $ | 654 | | | $ | 6,024 | | | $ | 70,889 | | | $ | 425,000 | | | $ | 502,567 | | |
Weighted average yield(2) | 3.54 | % | | 3.86 | % | | 3.32 | % | | 2.82 | % | | 2.90 | % | |
| Corporate bonds | | | | | | | | | | |
| Amortized cost | $ | — | | | $ | 357 | | | $ | 3,894 | | | $ | — | | | $ | 4,251 | | |
| Estimated fair value | $ | — | | | $ | 366 | | | $ | 3,877 | | | $ | — | | | $ | 4,243 | | |
Weighted average yield(2) | — | % | | 4.10 | % | | 4.54 | % | | — | % | | 4.51 | % | |
| Total available-for-sale securities | | | | | | | | | | |
| Amortized cost | $ | 652 | | | $ | 6,352 | | | $ | 72,062 | | | $ | 576,534 | | | $ | 655,600 | | |
| Estimated fair value | $ | 654 | | | $ | 6,440 | | | $ | 77,604 | | | $ | 600,756 | | | $ | 685,454 | | |
Weighted average yield(2) | 3.54 | % | | 3.88 | % | | 3.37 | % | | 2.48 | % | | 2.59 | % | |
(1) Actual maturities may differ from contractual maturities because issuers may have the rights to call or prepay obligations with or without prepayment penalties. | |
(2) Yields are calculated based on amortized cost. | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
The following tables show the number of securities, unrealized loss, and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired (“OTTI”), aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 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 | $ | 55,185 | | | $ | 1,464 | | | 8 | | $ | — | | | $ | — | | | — | | $ | 55,185 | | | $ | 1,464 | | | 8 |
Collateralized mortgage obligations - GSE residential | 7,591 | | | 26 | | | 6 | | — | | | — | | | — | | 7,591 | | | 26 | | | 6 |
State and political subdivisions | 44,008 | | | 861 | | | 32 | | 24 | | | 1 | | | 1 | | 44,032 | | | 862 | | | 33 |
| Corporate bonds | 3,418 | | | 82 | | | 1 | | — | | | — | | | — | | 3,418 | | | 82 | | | 1 |
Total temporarily impaired securities | $ | 110,202 | | | $ | 2,433 | | | 47 | | $ | 24 | | | $ | 1 | | | 1 | | $ | 110,226 | | | $ | 2,434 | | | 48 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Less than 12 Months | | 12 Months or More | | Total |
| Fair Value | | Unrealized Losses | | Number of Securities | | Fair Value | | Unrealized Losses | | Number of Securities | | Fair Value | | Unrealized Losses | | Number of Securities |
| (Dollars in thousands) |
| Available-for-sale securities | | | | | | | | | | | | |
Mortgage-backed - GSE residential | $ | — | | | $ | — | | | — | | $ | — | | | $ | — | | | — | | $ | — | | | $ | — | | | — |
Collateralized mortgage obligations - GSE residential | 9,933 | | | 42 | | | 5 | | — | | | — | | | — | | 9,933 | | | 42 | | | 5 |
State and political subdivisions | 8,525 | | | 31 | | | 8 | | 25 | | | — | | | 1 | | 8,550 | | | 31 | | | 9 |
| Corporate bonds | — | | | — | | | — | | — | | | — | | | — | | — | | | — | | | — |
| Total temporarily impaired securities | $ | 18,458 | | | $ | 73 | | | 13 | | $ | 25 | | | $ | — | | | 1 | | $ | 18,483 | | | $ | 73 | | | 14 |
The Company expects to recover the amortized cost basis over the term of the securities. 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, which may be maturity.
Gains and losses on the sale of debt securities are recorded on the trade date and are determined using the specific identification method. Gross gains of $21 thousand and $402 thousand and gross losses of $11 thousand and $9 thousand resulting from sales of available-for-sale securities were realized for the three months ended March 31, 2021 and 2020, respectively. The gross gains as of March 31, 2020, included $75 thousand related to a previously disclosed OTTI municipal security that was settled in 2020.
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Equity Securities
Equity securities consist of a $2 million investment in a Community Reinvestment Act (“CRA”) mutual fund and an $11 million privately-held security acquired in the fourth quarter of 2020 as part of a debt restructuring. Equity securities are included in “other assets” on the Consolidated Balance Sheets.
The privately-held security was acquired in partial satisfaction of debts previously contracted. 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 during the first quarter of 2021. The Company is required to make good faith efforts to dispose of the security. The shares may be held for a maximum of five years, subject to a five-year extension that would result in a change to Tier 1 capital.
The following is a summary of the unrealized and realized gains and losses recognized in net income on equity securities:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | | |
| (Dollars in thousands) |
| Net gains (losses) recognized during the reporting period on equity securities | $ | (39) | | | $ | 34 | | | | | |
Less: net gains recognized during the reporting period on equity securities sold during the reporting period | — | | | — | | | | | |
Unrealized gain (losses) recognized during the reporting period on equity securities still held at the reporting date | $ | (39) | | | $ | 34 | | | | | |
Note 4:Loans and Allowance for Loan Losses (“ALLL”)
Categories of loans at March 31, 2021 and December 31, 2020 include:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| | | |
| (Dollars in thousands) |
| Commercial | $ | 1,284,047 | | | $ | 1,338,757 | |
| Energy | 342,899 | | | 345,233 | |
| Commercial real estate | 1,191,634 | | | 1,179,534 | |
| Construction and land development | 617,200 | | | 563,144 | |
| Residential and multifamily real estate | 687,893 | | | 680,932 | |
| Paycheck Protection Program (“PPP”) | 336,355 | | | 292,230 | |
| | | |
| | | |
| Consumer | 62,917 | | | 55,270 | |
| Gross loans | 4,522,945 | | | 4,455,100 | |
| Less: Allowance for loan losses | 74,551 | | | 75,295 | |
| Less: Net deferred loan fees and costs | 14,345 | | | 13,203 | |
| Net loans | $ | 4,434,049 | | | $ | 4,366,602 | |
| | | |
| | | |
Allowance for Loan Losses
The ALLL is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the loan balance is not collectible. Subsequent recoveries, if any, are credited to the allowance.
The ALLL is evaluated on a regular basis by management and is based upon management’s periodic review of its ability to collect the 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. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The ALLL consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers all loans on
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
accrual and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process and loan categories. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
The Company evaluates the loan risk grading system definitions, portfolio segment definitions and ALLL methodology on an ongoing basis. No changes to loan definitions, segmentation, and ALLL methodology occurred during the first quarter of 2021.
The following tables summarize the activity in the ALLL by portfolio segment and disaggregated based on the Company’s impairment methodology. The allocation in one portfolio segment does not preclude its availability to absorb losses in other segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | Energy | | Commercial Real Estate | | Construction and Land Development | | Residential and Multifamily Real Estate | | PPP | | | | | | Consumer | | Total | | |
| (Dollars in thousands) | | |
| Three months ended March 31, 2021 | | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | | | | | | | | | | | | | | | | | | |
Beginning balance | $ | 24,693 | | | $ | 18,341 | | | $ | 22,354 | | | $ | 3,612 | | | $ | 5,842 | | | $ | — | | | | | | | $ | 453 | | | $ | 75,295 | | | |
Provision charged to expense | 7,015 | | | 1,951 | | | (1,745) | | | 225 | | | 214 | | | — | | | | | | | (160) | | | 7,500 | | | |
| Charge-offs | (8,266) | | | — | | | — | | | — | | | — | | | — | | | | | | | — | | | (8,266) | | | |
| Recoveries | 22 | | | — | | | — | | | — | | | — | | | — | | | | | | | — | | | 22 | | | |
| Ending balance | $ | 23,464 | | | $ | 20,292 | | | $ | 20,609 | | | $ | 3,837 | | | $ | 6,056 | | | $ | — | | | | | | | $ | 293 | | | $ | 74,551 | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | Energy | | Commercial Real Estate | | Construction and Land Development | | Residential and Multifamily Real Estate | | PPP | | | | | | Consumer | | Total | |
| (Dollars in thousands) | |
| Three months ended March 31, 2020 | | | | | | | | | | | | | | | | | |
| Allowance for loan losses | | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 35,864 | | | $ | 6,565 | | | $ | 8,085 | | | $ | 3,516 | | | $ | 2,546 | | | $ | — | | | | | | | $ | 320 | | | $ | 56,896 | | |
| Provision charged to expense | 3,271 | | | 2,313 | | | 4,538 | | | 1,505 | | | 2,141 | | | — | | | | | | | 182 | | | 13,950 | | |
| Charge-offs | (18,077) | | | (1,279) | | | — | | | — | | | — | | | — | | | | | | | (104) | | | (19,460) | | |
| Recoveries | 71 | | | — | | | — | | | — | | | — | | | — | | | | | | | 1 | | | 72 | | |
| Ending balance | $ | 21,129 | | | $ | 7,599 | | | $ | 12,623 | | | $ | 5,021 | | | $ | 4,687 | | | $ | — | | | | | | | $ | 399 | | | $ | 51,458 | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | Energy | | Commercial Real Estate | | Construction and Land Development | | Residential and Multifamily Real Estate | | PPP | | | | | | Consumer | | Total |
| (Dollars in thousands) |
| March 31, 2021 | | | | | | | | | | | | | | | | | | | |
| Period end allowance for loan losses allocated to: | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 832 | | | $ | 4,938 | | | $ | 2,990 | | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | — | | | $ | 8,760 | |
| Collectively evaluated for impairment | $ | 22,632 | | | $ | 15,354 | | | $ | 17,619 | | | $ | 3,837 | | | $ | 6,056 | | | $ | — | | | | | | | $ | 293 | | | $ | 65,791 | |
| Ending balance | $ | 23,464 | | | $ | 20,292 | | | $ | 20,609 | | | $ | 3,837 | | | $ | 6,056 | | | $ | — | | | | | | | $ | 293 | | | $ | 74,551 | |
| | | | | | | | | | | | | | | | | | | |
| Allocated to loans: | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 39,287 | | | $ | 27,215 | | | $ | 36,028 | | | $ | — | | | $ | 6,302 | | | $ | — | | | | | | | $ | 241 | | | $ | 109,073 | |
| Collectively evaluated for impairment | $ | 1,244,760 | | | $ | 315,684 | | | $ | 1,155,606 | | | $ | 617,200 | | | $ | 681,591 | | | $ | 336,355 | | | | | | | $ | 62,676 | | | $ | 4,413,872 | |
| Ending balance | $ | 1,284,047 | | | $ | 342,899 | | | $ | 1,191,634 | | | $ | 617,200 | | | $ | 687,893 | | | $ | 336,355 | | | | | | | $ | 62,917 | | | $ | 4,522,945 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial | | Energy | | Commercial Real Estate | | Construction and Land Development | | Residential and Multifamily Real Estate | | PPP | | | | | | Consumer | | Total |
| (Dollars in thousands) |
| December 31, 2020 | | | | | | | | | | | | | | | | | | |
| Period end allowance for loan losses allocated to: | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 1,115 | | | $ | 3,370 | | | $ | 5,048 | | | $ | — | | | $ | — | | | $ | — | | | | | | | $ | — | | | $ | 9,533 | |
| Collectively evaluated for impairment | $ | 23,578 | | | $ | 14,971 | | | $ | 17,306 | | | $ | 3,612 | | | $ | 5,842 | | | $ | — | | | | | | | $ | 453 | | | $ | 65,762 | |
| Ending balance | $ | 24,693 | | | $ | 18,341 | | | $ | 22,354 | | | $ | 3,612 | | | $ | 5,842 | | | $ | — | | | | | | | $ | 453 | | | $ | 75,295 | |
| Allocated to loans: | | | | | | | | | | | | | | | | | | | |
| Individually evaluated for impairment | $ | 44,678 | | | 26,045 | | | $ | 44,318 | | | $ | — | | | $ | 6,329 | | | $ | — | | | | | | | $ | 244 | | | $ | 121,614 | |
| Collectively evaluated for impairment | $ | 1,294,079 | | | $ | 319,188 | | | $ | 1,135,216 | | | $ | 563,144 | | | $ | 674,603 | | | $ | 292,230 | | | | | | | $ | 55,026 | | | $ | 4,333,486 | |
| Ending balance | $ | 1,338,757 | | | $ | 345,233 | | | $ | 1,179,534 | | | $ | 563,144 | | | $ | 680,932 | | | $ | 292,230 | | | | | | | $ | 55,270 | | | $ | 4,455,100 | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Credit Risk Profile
The Company analyzes its loan portfolio based on internal rating categories (grades 1 - 8), portfolio segmentation and payment activity. These categories are utilized to develop the associated ALLL. A description of the loan grades and segments follows:
Loan Grades
•Pass (risk rating 1-4) - The category includes loans that are considered satisfactory. The category includes borrowers that generally maintain good liquidity and financial condition or the credit is currently protected with sales trends remaining flat or declining. Most ratios compare favorably with industry norms and Company policies. Debt is programmed and timely repayment is expected.
•Special Mention (risk rating 5) - The category includes borrowers that generally exhibit adverse trends in operations or an imbalanced position in their balance sheet that has not reached a point where repayment is jeopardized. Credits are currently protected but, if left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s credit or lien position at a future date. These credits are not adversely classified and do not expose the Company to enough risk to warrant adverse classification.
•Substandard (risk rating 6) - The category includes borrowers that generally exhibit well-defined weakness(es) that jeopardize repayment. Credits are inadequately protected by the current worth and paying capacity of the obligor or of the collateral pledged. A distinct possibility exists that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard. Substandard loans include both performing and nonperforming loans and are broken out in the table below.
•Doubtful (risk rating 7) - The category includes borrowers that exhibit weaknesses inherent in a substandard credit and characteristics that these weaknesses make collection or liquidation in full highly questionable or improbable based on existing facts, conditions and values. Because of reasonably specific pending factors, which may work to the advantage and strengthening of the assets, classification as a loss is deferred until its more exact status may be determined.
•Loss (risk rating 8) - Credits which are considered uncollectible or of such little value that their continuance as a bankable asset is not warranted.
Loan Portfolio Segments
•Commercial - The category includes loans to commercial customers for use in financing working capital, equipment purchases and expansions. 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.
•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 and Multifamily Real Estate - The category includes loans that are generally secured by owner-occupied 1-4 family residences or multifamily properties. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers or underlying tenants. Credit risk in these loans can be impacted by economic
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
conditions within or outside the borrower’s market areas that might impact either property values, a borrower’s personal income, or residents’ income.
•PPP - The category includes loans that were established by the CARES Act which authorized forgivable loans to small businesses to pay their employees during the COVID-19 pandemic. The loans are 100 percent guaranteed by the SBA and repayment is primarily dependent on the borrower’s cash flow or SBA repayment approval.
•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.
The following tables present the credit risk profile of the Company’s loan portfolio based on internal rating categories (grades 1 - 8), portfolio segmentation, and payment activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | Pass | | Special Mention | | Substandard
Performing | | Substandard
Nonperforming | | Doubtful | | Loss | | Total | |
| | | | (Dollars in thousands) | |
| March 31, 2021 | | | | | | | | | | | | | | | | | |
| Commercial | | | | $ | 1,171,818 | | | $ | 43,247 | | | $ | 46,912 | | | $ | 20,409 | | | $ | 1,661 | | | $ | — | | | $ | 1,284,047 | | |
| Energy | | | | 141,441 | | | 82,314 | | | 92,032 | | | 23,421 | | | 3,691 | | | — | | | 342,899 | | |
| Commercial real estate | | | | 1,054,675 | | | 66,101 | | | 60,037 | | | 10,821 | | | — | | | — | | | 1,191,634 | | |
Construction and land development | | | | 616,061 | | | — | | | 1,139 | | | — | | | — | | | — | | | 617,200 | | |
| Residential and multifamily real estate | | | | 679,335 | | | 43 | | | 5,440 | | | 3,075 | | | — | | | — | | | 687,893 | | |
| PPP | | | | 336,355 | | | — | | | — | | | — | | | — | | | — | | | 336,355 | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Consumer | | | | 62,676 | | | — | | | — | | | 241 | | | — | | | — | | | 62,917 | | |
| | | | $ | 4,062,361 | | | $ | 191,705 | | | $ | 205,560 | | | $ | 57,967 | | | $ | 5,352 | | | $ | — | | | $ | 4,522,945 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | Pass | | Special Mention | | Substandard
Performing | | Substandard
Nonperforming | | Doubtful | | Loss | | Total |
| | | | (Dollars in thousands) |
| December 31, 2020 | | | | | | | | | | | | | | | | |
| Commercial | | | | $ | 1,182,519 | | | $ | 66,142 | | | $ | 63,407 | | | $ | 26,124 | | | $ | 565 | | | $ | — | | | $ | 1,338,757 | |
| Energy | | | | 145,598 | | | 90,134 | | | 83,574 | | | 22,177 | | | 3,750 | | | — | | | 345,233 | |
| Commercial real estate | | | | 1,035,056 | | | 67,710 | | | 57,680 | | | 19,088 | | | — | | | — | | | 1,179,534 | |
Construction and land development | | | | 561,871 | | | 125 | | | 1,148 | | | — | | | — | | | — | | | 563,144 | |
| Residential and multifamily real estate | | | | 672,327 | | | 305 | | | 5,199 | | | 3,101 | | | — | | | — | | | 680,932 | |
| PPP | | | | 292,230 | | | — | | | — | | | — | | | — | | | — | | | 292,230 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Consumer | | | | 55,026 | | | — | | | — | | | 244 | | | — | | | — | | | 55,270 | |
| | | | $ | 3,944,627 | | | $ | 224,416 | | | $ | 211,008 | | | $ | 70,734 | | | $ | 4,315 | | | $ | — | | | $ | 4,455,100 | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Loan Portfolio Aging Analysis
The following tables present the Company’s loan portfolio aging analysis as of March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
| March 31, 2021 | | | | | | | | | | | | | | | |
| Commercial | $ | 7,813 | | | $ | 403 | | | $ | 15,709 | | | $ | 23,925 | | | $ | 1,260,122 | | | $ | 1,284,047 | | | | $ | — | | |
| Energy | 748 | | | — | | | 6,741 | | | 7,489 | | | 335,410 | | | 342,899 | | | | — | | |
| Commercial real estate | — | | | — | | | 4,097 | | | 4,097 | | | 1,187,537 | | | 1,191,634 | | | | — | | |
Construction and land development | 862 | | | — | | | — | | | 862 | | | 616,338 | | | 617,200 | | | | — | | |
| Residential and multifamily real estate | 1,160 | | | — | | | 6,028 | | | 7,188 | | | 680,705 | | | 687,893 | | | | 3,183 | | |
| PPP | — | | | — | | | — | | | — | | | 336,355 | | | 336,355 | | | | — | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Consumer | — | | | — | | | — | | | — | | | 62,917 | | | 62,917 | | | | — | | |
| $ | 10,583 | | | $ | 403 | | | $ | 32,575 | | | $ | 43,561 | | | $ | 4,479,384 | | | $ | 4,522,945 | | | | $ | 3,183 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| December 31, 2020 | | | | | | | | | | | | | |
| Commercial | $ | 8,497 | | | $ | 264 | | | $ | 11,236 | | | $ | 19,997 | | | $ | 1,318,760 | | | $ | 1,338,757 | | | $ | — | |
| Energy | — | | | — | | | 7,173 | | | 7,173 | | | 338,060 | | | 345,233 | | | 372 | |
| Commercial real estate | 63 | | | 7,677 | | | 4,825 | | | 12,565 | | | 1,166,969 | | | 1,179,534 | | | — | |
Construction and land development | — | | | — | | | — | | | — | | | 563,144 | | | 563,144 | | | — | |
| Residential and multifamily real estate | 1,577 | | | — | | | 3,520 | | | 5,097 | | | 675,835 | | | 680,932 | | | 652 | |
| PPP | — | | | — | | | — | | | — | | | 292,230 | | | 292,230 | | | — | |
| Consumer | — | | | — | | | — | | | — | | | 55,270 | | | 55,270 | | | — | |
| $ | 10,137 | | | $ | 7,941 | | | $ | 26,754 | | | $ | 44,832 | | | $ | 4,410,268 | | | $ | 4,455,100 | | | $ | 1,024 | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Impaired Loans
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. The intent of concessions is to maximize collection.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. The following tables present loans individually evaluated for impairment, including all restructured and formerly restructured loans, for the periods ended March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Unpaid | | | | | | |
| Recorded Balance | | | Principal Balance | | Specific Allowance | | | | |
| (Dollars in thousands) |
| March 31, 2021 | | | | | | | | | | |
| Loans without a specific valuation | | | | | | | | | | |
| Commercial | $ | 36,174 | | | | $ | 38,124 | | | $ | — | | | | | |
| Energy | 103 | | | | 103 | | | — | | | | | |
| Commercial real estate | 10,553 | | | | 12,138 | | | — | | | | | |
| Construction and land development | — | | | | — | | | — | | | | | |
| Residential and multifamily real estate | 6,302 | | | | 6,558 | | | — | | | | | |
| PPP | — | | | | — | | | — | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Consumer | 241 | | | | 241 | | | — | | | | | |
| Loans with a specific valuation | | | | | | | | | | |
| Commercial | 3,113 | | | | 15,297 | | | 832 | | | | | |
| Energy | 27,112 | | | | 35,204 | | | 4,938 | | | | | |
| Commercial real estate | 25,475 | | | | 25,475 | | | 2,990 | | | | | |
| Construction and land development | — | | | | — | | | — | | | | | |
| Residential and multifamily real estate | — | | | | — | | | — | | | | | |
| PPP | — | | | | — | | | — | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Consumer | — | | | | — | | | — | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total | | | | | | | | | | |
| Commercial | 39,287 | | | | 53,421 | | | 832 | | | | | |
| Energy | 27,215 | | | | 35,307 | | | 4,938 | | | | | |
| Commercial real estate | 36,028 | | | | 37,613 | | | 2,990 | | | | | |
| Construction and land development | — | | | | — | | | — | | | | | |
| Residential and multifamily real estate | 6,302 | | | | 6,558 | | | — | | | | | |
| PPP | — | | | | — | | | — | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Consumer | 241 | | | | 241 | | | — | | | | | |
| $ | 109,073 | | | | $ | 133,140 | | | $ | 8,760 | | | | | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Unpaid | | | | | | |
| Recorded Balance | | Principal Balance | | Specific Allowance | | | | |
| (Dollars in thousands) |
| December 31, 2020 | | | | | | | | | |
| Loans without a specific valuation | | | | | | | | | |
| Commercial | $ | 36,111 | | | $ | 50,245 | | | $ | — | | | | | |
| Energy | 3,864 | | | 6,677 | | | — | | | | | |
| Commercial real estate | 10,079 | | | 11,663 | | | — | | | | | |
| Construction and land development | — | | | — | | | — | | | | | |
| Residential and multifamily real estate | 6,329 | | | 6,585 | | | — | | | | | |
| PPP | — | | | — | | | — | | | | | |
| Consumer | 244 | | | 244 | | | — | | | | | |
| Loans with a specific valuation | | | | | | | | | |
| Commercial | 8,567 | | | 8,567 | | | 1,115 | | | | | |
| Energy | 22,181 | | | 27,460 | | | 3,370 | | | | | |
| Commercial real estate | 34,239 | | | 34,239 | | | 5,048 | | | | | |
| Construction and land development | — | | | — | | | — | | | | | |
| Residential and multifamily real estate | — | | | — | | | — | | | | | |
| PPP | — | | | — | | | — | | | | | |
| Consumer | — | | | — | | | — | | | | | |
| | | | | | | | | |
| Total | | | | | | | | | |
| Commercial | 44,678 | | | 58,812 | | | 1,115 | | | | | |
| Energy | 26,045 | | | 34,137 | | | 3,370 | | | | | |
| Commercial real estate | 44,318 | | | 45,902 | | | 5,048 | | | | | |
| Construction and land development | — | | | — | | | — | | | | | |
| Residential and multifamily real estate | 6,329 | | | 6,585 | | | — | | | | | |
| PPP | — | | | — | | | — | | | | | |
| Consumer | 244 | | | 244 | | | — | | | | | |
| $ | 121,614 | | | $ | 145,680 | | | $ | 9,533 | | | | | |
The table below shows interest income recognized during the three month periods ended March 31, 2021 and 2020 for impaired loans, including all restructured and formerly restructured loans, held at the end of each period:
| | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | | | |
| (Dollars in thousands) |
| Commercial | $ | 303 | | | $ | 910 | | | | | | |
| Energy | 16 | | | 122 | | | | | | |
| Commercial real estate | 287 | | | 123 | | | | | | |
| Construction and land development | — | | | — | | | | | | |
| Residential and multifamily real estate | 36 | | | 40 | | | | | | |
| PPP | — | | | — | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Consumer | — | | | — | | | | | | |
| Total interest income recognized | $ | 642 | | | $ | 1,195 | | | | | | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
The table below shows the three month average balance of impaired loans for the periods ended March 31, 2021 and 2020 by loan category for impaired loans, including all restructured and formerly restructured loans, held at the end of each period:
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | |
| March 31, | | | |
| 2021 | | 2020 | | | | | |
| (Dollars in thousands) | |
| Commercial | $ | 41,919 | | | $ | 86,626 | | | | | | |
| Energy | 27,431 | | | 16,976 | | | | | | |
| Commercial real estate | 36,215 | | | 14,927 | | | | | | |
| Construction and land development | — | | | — | | | | | | |
| Residential and multifamily real estate | 6,316 | | | 5,230 | | | | | | |
| PPP | — | | | — | | | | | | |
| Consumer | 243 | | | 254 | | | | | | |
| Total average impaired loans | $ | 112,124 | | | $ | 124,013 | | | | | | |
Non-accrual Loans
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.
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. 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 category at March 31, 2021 and December 31, 2020:
| | | | | | | | | | | |
| | | |
| March 31, 2021 | | December 31, 2020 |
| (Dollars in thousands) |
| Commercial | $ | 22,070 | | | $ | 26,691 | |
| Energy | 27,112 | | | 25,927 | |
| Commercial real estate | 10,821 | | | 19,088 | |
| Construction and land development | — | | | — | |
| Residential and multifamily real estate | 3,075 | | | 3,101 | |
| PPP | — | | | — | |
| Consumer | 241 | | | 244 | |
| Total non-accrual loans | $ | 63,319 | | | $ | 75,051 | |
Troubled Debt Restructurings
Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession, excluding loan modifications as a result of the COVID-19 pandemic. The modification of terms typically includes the extension of maturity, reduction or deferment of monthly payment, or reduction of the stated interest rate.
For the three month periods ended March 31, 2021 and 2020, the modifications related to the TDRs below did not impact the ALLL because the loans were previously impaired and evaluated on an individual basis or enough collateral was obtained.
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
The table below presents loans restructured, excluding loans restructured as a result of the COVID-19 pandemic, during the three months ended March 31, 2021 and 2020, including the post-modification outstanding balance and the type of concession made:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | March 31, | | | | |
| 2021 | | 2020 | | | | |
| (Dollars in thousands) |
| Commercial | | | | | | | |
| - Interest rate reduction | $ | — | | | $ | 3,171 | | | | | |
| | | | | | | |
| | | | | | | |
| Energy | | | | | | | |
| - Extension of maturity date | — | | | 2,340 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total troubled debt restructurings | $ | — | | | $ | 5,511 | | | | | |
The balance of restructured loans, excluding loans restructured as a result of the COVID-19 pandemic, is provided below as of March 31, 2021 and December 31, 2020. In addition, the balance of those loans that are in default at any time during the past twelve months at March 31, 2021 and December 31, 2020 is provided below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| March 31, 2021 | | December 31, 2020 |
| Number of Loans | | Outstanding Balance | | Balance 90 days past due at any time during previous 12 months(1) | | Number of Loans | | Outstanding Balance | | Balance 90 days past due at any time during previous 12 months(1) |
| (Dollars in thousands) |
| Commercial | 6 | | $ | 21,631 | | | $ | 4,115 | | | 7 | | $ | 22,759 | | | $ | 2,776 | |
| Energy | 4 | | 10,850 | | | 2,619 | | | 4 | | 11,053 | | | 2,713 | |
| Commercial real estate | 4 | | 25,990 | | | — | | | 4 | | 26,038 | | | — | |
| Construction and land development | — | | — | | | — | | | — | | — | | | — | |
| Residential and multifamily real estate | 2 | | 3,244 | | | — | | | 2 | | 3,245 | | | — | |
| PPP | — | | — | | | — | | | — | | — | | | — | |
| Consumer | — | | — | | | — | | | — | | — | | | — | |
| Total troubled debt restructured loans | 16 | | $ | 61,715 | | | $ | 6,734 | | | 17 | | $ | 63,095 | | | $ | 5,489 | |
(1) Default is considered to mean 90 days or more past due as to interest or principal. |
| | | | | | | | | | | |
The TDRs above had an allowance of $5 million and $4 million as of March 31, 2021 and December 31, 2020, respectively.
Note 5:Derivatives and Hedging
Derivatives not designated as hedges are not speculative and result from a service the Company provides 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. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
As of March 31, 2021 and December 31, 2020, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| March 31, 2021 | | December 31, 2020 |
| Product | Number of Instruments | | Notional Amount | | Number of Instruments | | Notional Amount |
| (Dollars in thousands) |
| Back-to-back swaps | 56 | | $ | 546,947 | | | 56 | | $ | 515,567 | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
The table below presents the fair value of the Company’s derivative financial instruments and their classification on the Balance Sheet as of March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives | | Liability Derivatives |
| Balance Sheet | | March 31, | | December 31, | | Balance Sheet | | March 31, | | December 31, |
| Location | | 2021 | | 2020 | | Location | | 2021 | | 2020 |
| (Dollars in thousands) |
| Derivatives not designated as hedging instruments | | | | | | | | |
| Interest rate products | Other assets | | $ | 15,561 | | | $ | 24,094 | | | Other liabilities | | $ | 15,766 | | | $ | 24,454 | |
The effect of the Company’s derivative financial instruments that are not designated as hedging instruments are reported on the Consolidated Statements of Income as swap fee income, net, which includes swap fees earned upon origination and credit valuation adjustments that represents the risk of a counterparty’s default. The effect of the Company’s derivative financial instruments gain (loss) are reported on the Consolidated Statements of Cash Flows within “other assets” and “other liabilities”.
Note 6:Time Deposits and Borrowings
The scheduled maturities, excluding interest, of the Company’s borrowings at March 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | |
| 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 | $ | 763,848 | | | $ | 115,321 | | | $ | 42,981 | | | $ | 8,193 | | | $ | 1,411 | | | $ | 37 | | | $ | 931,791 | | |
Fed funds purchased & repurchase agreements | 3,294 | | | — | | | — | | | — | | | — | | | — | | | 3,294 | | |
| FHLB borrowings | 16,500 | | | 11,500 | | | 35,000 | | | — | | | 5,100 | | | 215,000 | | | 283,100 | | |
| | | | | | | | | | | | | | |
Trust preferred securities(1) | — | | | — | | | — | | | — | | | — | | | 974 | | | 974 | | |
| $ | 783,642 | | | $ | 126,821 | | | $ | 77,981 | | | $ | 8,193 | | | $ | 6,511 | | | $ | 216,011 | | | $ | 1,219,159 | | |
(1) The contract value of the trust preferred securities is $2.6 million and is currently being accreted to the maturity date of 2035.
Note 7:Change in Accumulated Other Comprehensive Income (“AOCI”)
Amounts reclassified from AOCI and the affected line items in the Consolidated Statements of Income during the three months ended March 31, 2021 and 2020, were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | |
| Three Months Ended | | | | |
| March 31, | | | | Affected Line Item in the |
| 2021 | | 2020 | | | | | | Statements of Income |
| (Dollars in thousands) | | |
Unrealized gains on available-for-sale securities | $ | 10 | | | $ | 393 | | | | | | | Gain on sale of available-for-sale debt securities |
| | | | | | | | | |
| Less: tax effect | 2 | | | 96 | | | | | | | Income tax expense |
| Net reclassified amount | $ | 8 | | | $ | 297 | | | | | | | |
Note 8:Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Management believes that, as of March 31, 2021, the Company and the Bank met all capital adequacy requirements to which they are subject.
The capital rules require the Company to maintain a 2.5% capital conservation buffer with respect to Common Equity Tier I capital, Tier I capital to risk-weighted assets, and total capital to risk-weighted assets, which is included in the column “Minimum Capital Required - Basel III” within the table below. A financial institution with a conservation buffer of less than the required amount is
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
subject to limitations on capital distributions, including dividend payments and stock repurchases, as well as certain discretionary bonus payments to executive officers.
The Company’s and the Bank’s actual capital amounts and ratios as of March 31, 2021 and December 31, 2020 are presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Actual | | | | Minimum Capital Required - Basel III | | Required to be Considered Well Capitalized |
| Amount | | Ratio | | | | | | Amount | | Ratio | | Amount | | Ratio |
| (Dollars in thousands) |
| March 31, 2021 | | | | | | | | | | | | | | | |
| Total Capital to Risk-Weighted Assets | | | | | | | | | | | | | | |
| Consolidated | $ | 668,393 | | | 13.3 | % | | | | | | $ | 528,882 | | | 10.5 | % | | N/A | | N/A |
| Bank | 624,240 | | | 12.4 | | | | | | | 528,704 | | | 10.5 | | | $ | 503,528 | | | 10.0 | % |
| Tier I Capital to Risk-Weighted Assets | | | | | | | | | | | | | | |
| Consolidated | 605,281 | | | 12.0 | | | | | | | 428,143 | | | 8.5 | | | N/A | | N/A |
| Bank | 561,155 | | | 11.1 | | | | | | | 427,999 | | | 8.5 | | | 402,822 | | | 8.0 | |
| Common Equity Tier 1 to Risk-Weighted Assets | | | | | | | | | | | | |
| Consolidated | 604,307 | | | 12.0 | | | | | | | 352,588 | | | 7.0 | | | N/A | | N/A |
| Bank | 561,155 | | | 11.1 | | | | | | | 352,470 | | | 7.0 | | | 327,293 | | | 6.5 | |
| Tier I Capital to Average Assets | | | | | | | | | | | | | | |
| Consolidated | 605,281 | | | 10.5 | | | | | | | 230,468 | | | 4.0 | | | N/A | | N/A |
| Bank | $ | 561,155 | | | 9.7 | % | | | | | | $ | 230,354 | | | 4.0 | % | | $ | 287,942 | | | 5.0 | % |
| December 31, 2020 | | | | | | | | | | | | | | | |
| Total Capital to Risk-Weighted Assets | | | | | | | | | | | | | | |
| Consolidated | $ | 656,806 | | | 13.1 | % | | | | | | $ | 527,486 | | | 10.5 | % | | N/A | | N/A |
| Bank | 611,533 | | | 12.2 | | | | | | | 527,217 | | | 10.5 | | | $ | 502,111 | | | 10.0 | % |
| Tier I Capital to Risk-Weighted Assets | | | | | | | | | | | | | | |
| Consolidated | 593,865 | | | 11.8 | | | | | | | 427,012 | | | 8.5 | | | N/A | | N/A |
| Bank | 548,615 | | | 10.9 | | | | | | | 426,794 | | | 8.5 | | | 401,689 | | | 8.0 | |
| Common Equity Tier 1 to Risk-Weighted Assets | | | | | | | | | | | | |
| Consolidated | 592,902 | | | 11.8 | | | | | | | 351,657 | | | 7.0 | | | N/A | | N/A |
| Bank | 548,615 | | | 10.9 | | | | | | | 351,478 | | | 7.0 | | | 326,372 | | | 6.5 | |
| Tier I Capital to Average Assets | | | | | | | | | | | | | | |
| Consolidated | 593,865 | | | 10.8 | | | | | | | 219,550 | | | 4.0 | | | N/A | | N/A |
| Bank | $ | 548,615 | | | 10.0 | % | | | | | | $ | 219,441 | | | 4.0 | % | | $ | 274,302 | | | 5.0 | % |
Note 9:Stock-Based Compensation
The Company issues stock-based compensation in the form of nonvested restricted stock and stock appreciation rights under the 2018 Omnibus Equity Incentive Plan (“Omnibus Plan”). The Omnibus Plan will expire on the tenth anniversary of its effective date. In addition, the Company has an Employee Stock Purchase Plan that was reinstated during the third quarter of 2020. The aggregate number of shares authorized for future issuance under the Omnibus Plan is 1,831,858 shares as of March 31, 2021.
The table below summarizes the stock-based compensation for the three months ended March 31, 2021 and 2020:
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | | |
| (Dollars in thousands) |
| Stock appreciation rights | $ | 236 | | | $ | 256 | | | | | |
| Performance-based stock awards | (266) | | | 74 | | | | | |
| Restricted stock units and awards | 665 | | | 604 | | | | | |
| Employee stock purchase plan | 14 | | | — | | | | | |
| Total stock-based compensation | $ | 649 | | | $ | 934 | | | | | |
Performance-Based Stock Awards (“PBSAs”)
The Company awards PBSAs to key officers of the Company. The performance-based shares typically cliff-vest at the end of three years based on attainment of certain performance metrics developed by the Compensation Committee. The ultimate number of shares issuable under each performance award is the product of the award target and the award payout percentage given the level of achievement. The award payout percentages by level of achievement range between 0% of target and 150% of target.
During the three months ended March 31, 2021, the Company granted 63,631 PBSAs. The performance metrics include three year cumulative, adjusted earnings per share and relative total shareholder return.
The following table summarizes the status of and changes in the performance-based awards:
| | | | | | | | | | | | | | |
| | Performance Based Stock Awards |
| | Number of Shares | | Weighted-Average Grant Date Fair Value |
| Unvested, January 1, 2021 | | 231,631 | | $10.51 |
| Granted | | 63,631 | | 12.89 |
| Vested | | 0 | | 0.00 |
| Forfeited | | 0 | | 0.00 |
Unvested, March 31, 2021 | | 295,262 | | $11.02 |
Unrecognized stock-based compensation related to the performance awards issued through March 31, 2021 was $968 thousand and is expected to be recognized over 2.7 years.
Restricted Stock Units (“RSUs”) and Restricted Stock Awards (“RSAs”)
The Company issues RSUs and RSAs to provide incentives to key officers, employees, and nonemployee directors. Awards are typically granted annually as determined by the Compensation Committee. The service-based RSUs typically vest in equal amounts over three years. The service-based RSAs typically cliff-vest after 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, 2021 | | 369,217 | | $12.61 |
| Granted | | 194,211 | | 12.87 |
| Vested | | (109,770) | | 14.28 |
| Forfeited | | 0 | | 0.00 |
Unvested, March 31, 2021 | | 453,658 | | $12.32 |
Unrecognized stock-based compensation related to the RSUs and RSAs issued through March 31, 2021 was $4 million and is expected to be recognized over 2.3 years.
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Note 10:Income Tax
An income tax expense reconciliation at the statutory rate to the Company’s actual income tax expense is shown below:
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| 2021 | | 2020 | | | | |
| (Dollars in thousands) |
| Computed at the statutory rate (21%) | $ | 3,138 | | | $ | 872 | | | | | |
| Increase (decrease) resulting from | | | | | | | |
| Tax-exempt income | (790) | | | (790) | | | | | |
| Nondeductible expenses | 50 | | | 64 | | | | | |
| | | | | | | |
| State income taxes | 496 | | | 142 | | | | | |
| Equity based compensation | 14 | | | 26 | | | | | |
| | | | | | | |
| Other adjustments | — | | | (21) | | | | | |
| Actual tax expense | $ | 2,908 | | | $ | 293 | | | | | |
| | | | | | | |
The tax effects of temporary differences related to deferred taxes shown on the Consolidated Balance Sheets are presented below:
| | | | | | | | | | | |
| | | |
| March 31, 2021 | | December 31, 2020 |
| (Dollars in thousands) |
| Deferred tax assets | | | |
| | | |
| Allowance for loan losses | $ | 17,944 | | | $ | 18,124 | |
| Lease incentive | 550 | | | 564 | |
| | | |
| | | |
| Loan fees | 3,453 | | | 3,178 | |
| | | |
| Accrued expenses | 874 | | | 2,128 | |
| Deferred compensation | 2,197 | | | 2,474 | |
| | | |
| State tax credit | 2,447 | | | 2,621 | |
| Other | 452 | | | 946 | |
| Total deferred tax asset | 27,917 | | | 30,035 | |
| Deferred tax liability | | | |
| | | |
| Net unrealized gain on securities available-for-sale | (7,308) | | | (9,531) | |
| FHLB stock basis | (1,248) | | | (1,209) | |
| Premises and equipment | (2,703) | | | (2,881) | |
| Other | (1,446) | | | (1,601) | |
| Total deferred tax liability | (12,705) | | | (15,222) | |
| Net deferred tax asset | $ | 15,212 | | | $ | 14,813 | |
| | | |
| | | |
Note 11:Disclosures about Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 Unobservable inputs supported by little or no market activity and significant to the fair value of the assets or liabilities.
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Recurring Measurements
The following list presents the assets and liabilities recognized in the accompanying Consolidated Balance Sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | |
| Fair Value Description | | Valuation Hierarchy Level | | Where Fair Value Balance Can Be Found |
Available-for-Sale Securities | Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. | | Level 2 | | |
| 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 | | |
Nonrecurring Measurements
The following tables present assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | March 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 | $ | 46,940 | | | $ | — | | | $ | — | | | $ | 46,940 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2020 |
| | | 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 | $ | 55,454 | | | $ | — | | | $ | — | | | $ | 55,454 | |
| | | | | | | |
| Foreclosed assets held-for-sale | $ | 2,347 | | | $ | — | | | $ | — | | | $ | 2,347 | |
Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying Consolidated Balance Sheets.
Collateral-dependent Impaired Loans, Net of ALLL
The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Office of the Chief Credit Officer.
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
Appraisals are reviewed for accuracy and consistency by the Office of the Chief Credit Officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the Office of the Chief Credit Officer by comparison to historical results.
Foreclosed Assets Held-for-Sale
The fair value of foreclosed assets-held-for-sale is based on the appraised fair value of the collateral, less estimated cost to sell.
Unobservable (Level 3) Inputs
The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements at March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Fair Value | | Valuation Techniques | | Unobservable Inputs | | Range
(Weighted Average) |
| (Dollars in thousands) |
| Collateral-dependent impaired loans | $ | 46,940 | | | Market comparable properties | | Marketability discount | | 10% - 98% (27%) |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Fair Value | | Valuation Techniques | | Unobservable Inputs | | Range
(Weighted Average) |
| (Dollars in thousands) |
| Collateral-dependent impaired loans | $ | 55,454 | | | Market comparable properties | | Marketability discount | | 1% - 98% (24%) |
| | | | | | | |
| Foreclosed assets held-for-sale | $ | 2,347 | | | Market comparable properties | | Marketability discount | | 7% - 10% (9%) |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
The following tables present the estimated fair values of the Company’s financial instruments at March 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 |
| Carrying | | Fair Value Measurements |
| Amount | | Level 1 | | Level 2 | | Level 3 | | Total |
| (Dollars in thousands) |
| Financial Assets | | | | | | | | | |
| Cash and cash equivalents | $ | 630,787 | | | $ | 630,787 | | | $ | — | | | $ | — | | | $ | 630,787 | |
| Available-for-sale securities | 685,454 | | | — | | | 685,454 | | | — | | | 685,454 | |
| Loans, net of allowance for loan losses | 4,434,049 | | | — | | | — | | | 4,419,714 | | | 4,419,714 | |
| Restricted equity securities | 14,080 | | | — | | | — | | | 14,080 | | | 14,080 | |
| Interest receivable | 17,987 | | | — | | | 17,987 | | | — | | | 17,987 | |
| Equity securities | 13,405 | | | — | | | 2,216 | | | 11,189 | | | 13,405 | |
| Derivative assets | 15,561 | | | — | | | 15,561 | | | — | | | 15,561 | |
| $ | 5,811,323 | | | $ | 630,787 | | | $ | 721,218 | | | $ | 4,444,983 | | | $ | 5,796,988 | |
| Financial Liabilities | | | | | | | | | |
| Deposits | $ | 5,051,570 | | | $ | 794,559 | | | $ | — | | | $ | 4,289,169 | | | $ | 5,083,728 | |
Federal funds purchased and repurchase agreements | 3,294 | | | — | | | 3,294 | | | — | | | 3,294 | |
| Federal Home Loan Bank advances | 283,100 | | | — | | | 292,667 | | | — | | | 292,667 | |
| Other borrowings | 974 | | | — | | | 2,235 | | | — | | | 2,235 | |
| Interest payable | 1,911 | | | — | | | 1,911 | | | — | | | 1,911 | |
| Derivative liabilities | 15,766 | | | — | | | 15,766 | | | — | | | 15,766 | |
| $ | 5,356,615 | | | $ | 794,559 | | | $ | 315,873 | | | $ | 4,289,169 | | | $ | 5,399,601 | |
| | | | | | | | |
| Notes to Consolidated Financial Statements (unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Carrying | | Fair Value Measurements |
| Amount | | Level 1 | | Level 2 | | Level 3 | | Total |
| (Dollars in thousands) |
| Financial Assets | | | | | | | | | |
| Cash and cash equivalents | $ | 408,810 | | | $ | 408,810 | | | $ | — | | | $ | — | | | $ | 408,810 | |
| Available-for-sale securities | 654,588 | | | — | | | 654,588 | | | — | | | 654,588 | |
| Loans, net of allowance for loan losses | 4,366,602 | | | — | | | — | | | 4,351,970 | | | 4,351,970 | |
| Restricted equity securities | 15,543 | | | — | | | — | | | 15,543 | | | 15,543 | |
| Interest receivable | 17,236 | | | — | | | 17,236 | | | — | | | 17,236 | |
| Equity securities | 13,436 | | | — | | | 2,247 | | | 11,189 | | | 13,436 | |
| Derivative assets | 24,094 | | | — | | | 24,094 | | | — | | | 24,094 | |
| $ | 5,500,309 | | | $ | 408,810 | | | $ | 698,165 | | | $ | 4,378,702 | | | $ | 5,485,677 | |
| Financial Liabilities | | | | | | | | | |
| Deposits | $ | 4,694,740 | | | $ | 718,459 | | | $ | — | | | $ | 4,015,792 | | | $ | 4,734,251 | |
Federal funds purchased and repurchase agreements | 2,306 | | | — | | | 2,306 | | | — | | | 2,306 | |
| Federal Home Loan Bank advances | 293,100 | | | — | | | 309,020 | | | — | | | 309,020 | |
| Other borrowings | 963 | | | — | | | 2,024 | | | — | | | 2,024 | |
| Interest payable | 2,163 | | | — | | | 2,163 | | | — | | | 2,163 | |
| Derivative liabilities | 24,454 | | | — | | | 24,454 | | | — | | | 24,454 | |
| $ | 5,017,726 | | | $ | 718,459 | | | $ | 339,967 | | | $ | 4,015,792 | | | $ | 5,074,218 | |
Note 12:Commitments and Credit Risk
Commitments
The Company had the following commitments at March 31, 2021 and December 31, 2020:
| | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| (Dollars in thousands) |
| Commitments to originate loans | $ | 112,738 | | | $ | 99,596 | |
| Standby letters of credit | 41,256 | | | 48,607 | |
| Lines of credit | 1,401,710 | | | 1,423,038 | |
| | | |
| Total | $ | 1,555,704 | | | $ | 1,571,241 | |
Note 13:Legal and Regulatory Proceedings
General Litigation
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on February 26, 2021 (the “2020 Form 10-K”). Results of operations for the three month period ended March 31, 2021 are not necessarily indicative of results to be attained for any other period. Certain statements in this report contain forward-looking statements regarding our future plans, objectives, beliefs, expectations, representations and projections. See "Forward-Looking Information" which is incorporated herein by reference. Actual results could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in Item 1A – "Risk Factors" in the 2020 Form 10-K.
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., and its consolidated subsidiaries. References to “CrossFirst Bank” and the “Bank” refer to CrossFirst Bank, our wholly-owned consolidated bank subsidiary.
First Quarter 2021 Highlights
During the first quarter ended March 31, 2021, we accomplished the following:
•$6 billion of assets, an increase of $339 million or 6% from December 31, 2020 driven by deposit growth;
•Efficiency ratio of 50.4% for the first quarter of 2020;
•$68 million of loan growth from the previous quarter and $512 million or 13% over the last twelve months driven by PPP loan funding;
•$357 million of deposit growth from the previous quarter and $1 billion or 27% over the last twelve months;
•Book value per share of $12.17 at March 31, 2021 compared to $11.75 at March 31, 2020;
•Hired Jana Merfen as our chief technology officer. Jana brings 16 years of financial services industry experience with a focus on evaluating investments in and benefits from technology. She will oversee customer-facing technology to better serve and respond to customer needs.
Update on the COVID-19 Global Pandemic (“COVID-19”) Impact
The COVID-19 pandemic has caused, and may continue to cause, economic uncertainty and a disruption to the financial markets, the duration and extent of which is not currently known. A discussion of the impact of the COVID-19 pandemic on the Company and its operations and measures undertaken by the Company in response thereto is provided below.
Bank Operations
The Company implemented its business continuity procedures in March 2020 as a result of the COVID-19 pandemic. In April 2021, substantially all employees returned to on-premise work and the Company is evaluating hybrid working opportunities. In addition, the bank lobbies were re-opened to the public. No material interruptions to our business operations have occurred to date.
Paycheck Protection Program (“PPP”) Lending Facility and Loans
The PPP was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in March 2020 and authorized forgivable loans to small businesses. The Bank provided PPP loans to support current customers and foster relationships with new customers. The loans earn interest at 1%, include fees between 1% and 5% and typically mature in two years. The loans originated under the PPP received a 0% risk weight under the regulatory capital rules which resulted in increased Common Equity Tier 1, Tier 1, and Tier 2 capital ratios, but the PPP loans are included in the calculation of our Leverage ratio.
The Consolidated Appropriations Act of 2021 allocated an additional $284 billion in PPP funding. On January 11, 2021, the Small Business Administration (“SBA”) reopened PPP funds for first draw borrowers and on January 13, 2021, opened PPP funds for second draw borrowers. The second round of PPP loans have similar terms to the first round of PPP loans mentioned above, but typically mature in five years. The PPP loans were available through May 5, 2021. The SBA will continue to fund outstanding, approved PPP applications.
The following table summarizes the impact of the PPP loans on our financials:
| | | | | | | | | | | |
| |
| As of or for the Period Ended March 31, |
| 2021 | | 2020 |
| (Dollars in thousands) |
| PPP Loan Activity | | | |
| Outstanding loan balance, beginning | $ | 292,230 | | | $ | — | |
| Loan originations | 110,962 | | | — | |
| Loan payoffs | (66,837) | | | — | |
| Outstanding loan balance, end | $ | 336,355 | | | $ | — | |
| | | |
| PPP Loan Fee Activity | | | |
| Unearned fee balance, beginning | $ | 4,189 | | | $ | — | |
| Unearned fees added | 4,105 | | | — | |
| Earned fees recognized | (2,415) | | | — | |
| Unearned fee balance, end | $ | 5,879 | | | $ | — | |
Loan Modifications
The CARES Act allowed financial institutions to elect to suspend GAAP principles and regulatory determinations for loan modifications relating to the COVID-19 pandemic that would otherwise require evaluation as troubled debt restructurings (“TDR”). On December 27, 2020, the Consolidated Appropriations Act of 2021 was signed into law, which extended the period during which the Company may elect not to consider whether loan modifications relating to the COVID-19 pandemic are TDRs through January 2, 2022. The Company elected to apply the guidance.
As of March 31, 2021, the Company had approximately $96 million of loans modified and not considered TDRs. The Company expects most of these modified loans to recover from the pandemic, but uncertainty regarding the short-term and long-term effects of the COVID-19 pandemic remain that may require the Company to (i) downgrade modified loans which may increase our Allowance for Loan Losses (“ALLL”), (ii) reverse interest income previously recognized but not received, and (iii) charge-off modified loans.
Loan Portfolio and Credit Quality
The COVID-19 pandemic continues to impact our borrowers and the Company’s credit metrics remain elevated. However, the Company’s key credit metrics improved during the first quarter of 2021. The Company remains cautiously optimistic that the economic outlook will continue to improve, which could continue to improve the Company’s credit metrics.
Forty four percent of classified loans were within our energy portfolio at March 31, 2021. A portion of energy loans will receive updated borrowing base redeterminations in the next two quarters. The Company anticipates that higher, stabilized energy prices will improve the borrowers’ first quarter results and related collateral that may lead to significant, positive grade migration in the second and third quarter of 2021.
Investment in Technology
In April 2021, the Company became a limited partner in a $150 million venture capital investment fund designed to help accelerate technology adoption at community banks. The Company committed to a total investment of $3 million. The investment fund will help community banks find solutions that make them more competitive and cost-efficient by identifying and investing in companies that solve problems the community banks face.
Performance Measures
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of or For the Quarter Ended |
| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30,
2020 | | March 31,
2020 |
| (Dollars in thousands, except per share data) |
Return on average assets(1) | 0.84 | % | | 0.58 | % | | 0.58 | % | | (0.54) | % | | 0.31 | % |
Return on average equity(1) | 7.80 | % | | 5.19 | % | | 5.19 | % | | (4.84) | % | | 2.53 | % |
| Earnings (loss) per share | $ | 0.23 | | | $ | 0.16 | | | $ | 0.15 | | | $ | (0.14) | | | $ | 0.07 | |
| Diluted earnings (loss) per share | $ | 0.23 | | | $ | 0.15 | | | $ | 0.15 | | | $ | (0.14) | | | $ | 0.07 | |
Efficiency(2) | 50.41 | % | | 53.35 | % | | 53.03 | % | | 70.81 | % | | 55.10 | % |
| Equity to assets | 10.48 | % | | 11.03 | % | | 11.22 | % | | 11.13 | % | | 12.08 | % |
(1) Interim periods annualized |
(2) We calculate efficiency ratio as noninterest expense divided by the sum of net interest income and noninterest income. |
Results of Operations
Net Interest Income
Net interest income is presented on a tax-equivalent basis below. A tax-equivalent basis makes all income taxable at the same rate. For example, $100 of tax-exempt income would be presented as $126.58, an amount that, if taxed at the statutory federal income tax rate of 21% would yield $100. We believe a tax-equivalent basis provides for improved comparability between the various earning assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended |
| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30,
2020 | | March 31,
2020 |
Yield on securities - tax equivalent(1) | 2.89 | % | | 2.96 | % | | 2.93 | % | | 3.07 | % | | 3.21 | % |
| Yield on loans | 3.94 | | | 4.00 | | | 3.90 | | | 4.28 | | | 4.98 | |
Yield on earning assets - tax equivalent(1) | 3.50 | | | 3.71 | | | 3.66 | | | 3.96 | | | 4.57 | |
| Cost of interest-bearing deposits | 0.57 | | | 0.69 | | | 0.80 | | | 0.95 | | | 1.69 | |
| Cost of total deposits | 0.48 | | | 0.58 | | | 0.67 | | | 0.79 | | | 1.46 | |
| Cost of FHLB and short-term borrowings | 1.79 | | | 1.78 | | | 1.50 | | | 1.35 | | | 1.72 | |
| Cost of funds | 0.56 | | | 0.65 | | | 0.75 | | | 0.85 | | | 1.49 | |
Net interest margin - tax equivalent(1) | 3.00 | % | | 3.12 | % | | 2.98 | % | | 3.19 | % | | 3.24 | % |
(1) Tax-exempt income is calculated on a tax-equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21%. |
The following tables present, for the periods indicated, average balance sheet information, interest income, interest expense and the corresponding average yield and rates paid:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | |
| March 31, | |
| 2021 | | 2020 | |
| Average Balance | | Interest Income / Expense | | Average Yield / Rate(4) | | Average Balance | | Interest Income / Expense | | Average Yield / Rate(4) | |
| (Dollars in thousands) | |
| Interest-earning assets: | | | | | | | | | | | | |
Securities - taxable | $ | 217,231 | | | $ | 916 | | | 1.71 | % | | $ | 308,671 | | | $ | 2,066 | | | 2.69 | % | |
Securities - tax-exempt(1) | 479,953 | | | 4,055 | | | 3.43 | | | 451,443 | | | 4,007 | | | 3.57 | | |
Federal funds sold | — | | | — | | | — | | | 4,136 | | | 18 | | | 1.74 | | |
Interest-bearing deposits in other banks | 452,305 | | | 128 | | | 0.11 | | | 158,044 | | | 473 | | | 1.20 | | |
Gross loans, net of unearned income(2)(3) | 4,506,843 | | | 43,758 | | | 3.94 | | | 3,905,005 | | | 48,339 | | | 4.98 | | |
Total interest-earning assets(1) | 5,656,332 | | | $ | 48,857 | | | 3.50 | % | | 4,827,299 | | | $ | 54,903 | | | 4.57 | % | |
Allowance for loan losses | (78,371) | | | | | | | (57,627) | | | | | | |
Other non-interest-earning assets | 220,206 | | | | | | | 205,859 | | | | | | |
| Total assets | $ | 5,798,167 | | | | | | | $ | 4,975,531 | | | | | | |
| Interest-bearing liabilities | | | | | | | | | | | | |
Transaction deposits | $ | 716,763 | | | $ | 364 | | | 0.21 | % | | $ | 341,497 | | | $ | 865 | | | 1.02 | % | |
Savings and money market deposits | 2,421,765 | | | 2,388 | | | 0.40 | | | 1,886,785 | | | 6,735 | | | 1.44 | | |
Time deposits | 972,006 | | | 2,976 | | | 1.24 | | | 1,165,800 | | | 6,672 | | | 2.30 | | |
Total interest-bearing deposits | 4,110,534 | | | 5,728 | | | 0.57 | | | 3,394,082 | | | 14,272 | | | 1.69 | | |
FHLB and short-term borrowings | 290,187 | | | 1,284 | | | 1.79 | | | 391,143 | | | 1,673 | | | 1.72 | | |
Trust preferred securities, net of fair value adjustments | 965 | | | 24 | | | 9.96 | | | 923 | | | 35 | | | 14.69 | | |
Non-interest-bearing deposits | 731,472 | | | — | | | — | | | 540,318 | | | — | | | — | | |
Cost of funds | 5,133,158 | | | $ | 7,036 | | | 0.56 | % | | 4,326,466 | | | $ | 15,980 | | | 1.49 | % | |
Other liabilities | 39,134 | | | | | | | 36,106 | | | | | | |
Stockholders’ equity | 625,875 | | | | | | | 612,959 | | | | | | |
| Total liabilities and stockholders’ equity | $ | 5,798,167 | | | | | | | $ | 4,975,531 | | | | | | |
Net interest income(1) | | | $ | 41,821 | | | | | | | $ | 38,923 | | | | |
Net interest spread(1) | | | | | 2.94 | % | | | | | | 3.08 | % | |
Net interest margin(1) | | | | | 3.00 | % | | | | | | 3.24 | % | |
(1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%. | |
(2) Loans, net of unearned income includes non-accrual loans of $63 million and $26 million as of March 31, 2021 and 2020, respectively. | |
(3) Loan interest income includes loan fees of $4 million and $2 million for the three months ended March 31, 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. | |
Changes in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to: (i) changes in volume (change in volume times old rate); (ii) changes in rates (change in rate times old volume); and (iii) changes in rate/volume (change in rate times the change in volume).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| March 31, 2021 over 2020 | | | | |
| Average Volume | | Yield/Rate | | Net Change(2) | | | | | | | | |
| (Dollars in thousands) | |
| Interest Income | | | | | | | | | | | | | |
| Securities - taxable | $ | (511) | | | $ | (639) | | | $ | (1,150) | | | | | | | | | |
Securities - tax-exempt(1) | 246 | | | (198) | | | 48 | | | | | | | | | |
| Federal funds sold | (18) | | | — | | | (18) | | | | | | | | | |
| Interest-bearing deposits in other banks | 344 | | | (689) | | | (345) | | | | | | | | | |
| Gross loans, net of unearned income | 6,781 | | | (11,362) | | | (4,581) | | | | | | | | | |
Total interest income(1) | 6,842 | | | (12,888) | | | (6,046) | | | | | | | | | |
| Interest Expense | | | | | | | | | | | | | |
| Transaction deposits | 510 | | | (1,011) | | | (501) | | | | | | | | | |
| Savings and money market deposits | 1,520 | | | (5,867) | | | (4,347) | | | | | | | | | |
| Time deposits | (973) | | | (2,723) | | | (3,696) | | | | | | | | | |
| Total interest-bearing deposits | 1,057 | | | (9,601) | | | (8,544) | | | | | | | | | |
| FHLB and short-term borrowings | (444) | | | 55 | | | (389) | | | | | | | | | |
Trust preferred securities, net of fair value adjustments | 1 | | | (12) | | | (11) | | | | | | | | | |
| Total interest expense | 614 | | | (9,558) | | | (8,944) | | | | | | | | | |
Net interest income(1) | $ | 6,228 | | | $ | (3,330) | | | $ | 2,898 | | | | | | | | | |
| | | | | | | | | | | | | |
(1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%. | |
(2) The change in interest not due solely to volume or rate has been allocated in proportion to the respective absolute dollar amounts of the change in volume or rate. | |
Interest income - Interest income declined for the three months ended March 31, 2021 compared to the same period in 2020. Lower yields on earning assets were driven by a decline in the interest rate environment. The decline in asset yields was partially offset by year-over-year loan growth and PPP loan income. We anticipate PPP loan fees to positively impact our yield going forward in 2021 as loans are forgiven and we accelerate the recognition of the unearned loan fees.
Interest expense - Interest expense declined for the three months ended March 31, 2021 compared to the same period in 2020. The cost of interest-bearing deposits continued to decline due to strategic rate changes in our deposit products driven by the declining interest rate environment. The decline in rates was offset by an increase in average volume due to increased liquidity in the market. The cost of FHLB and other borrowings remained relatively flat compared to 2020 as the Company’s increase in cash offset the need to renew or increase these borrowings. We currently anticipate our cost of funds to decline slightly throughout 2021 as we continue to reduce rates on deposits and longer term borrowings.
Net interest income - Net interest income increased slightly for the three months ended March 31, 2021 compared to the same period in 2020 driven by growth in average earning assets, offset by compression in net interest margin as earning assets repriced quicker than interest-bearing liabilities. We currently expect the net interest margin to remain flat in 2021 as earning assets continue to reprice, offset by maturities in borrowed funds that have higher interest rates. Our expected margin may continue to be impacted by the COVID-19 pandemic, placing loans on non-accrual status, including loans with deferred payments, and changes in competition.
Impact of Transition Away from LIBOR
The Company had more than $1.5 billion in loans tied to LIBOR at March 31, 2021. The Company is replacing/adding loan document language to account for the transition away from LIBOR as loans renew or originate. The Company adopted Accounting Standards Update (“ASU”) 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” in 2020. The ASU allows the Company to recognize the modification related to LIBOR as a continuation of the old contract, rather than a cancellation of the old contract resulting in a write off of unamortized fees and creation of a new contract.
Non-Interest Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended |
| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30,
2020 | | March 31,
2020 |
| (Dollars in thousands) |
| Total non-interest income | $ | 4,144 | | | $ | 2,949 | | | $ | 4,063 | | | $ | 2,634 | | | $ | 2,087 | |
Non-interest income to average assets(1) | 0.29 | % | | 0.21 | % | | 0.29 | % | | 0.19 | % | | 0.17 | % |
(1) Interim periods annualized. |
The components of non-interest income were as follows for the periods shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| | | | | Change | | | | | | |
| 2021 | | 2020 | | $ | | % | | | | | | | | |
| (Dollars in thousands) |
Service charges and fees on customer accounts | $ | 957 | | | $ | 508 | | | $ | 449 | | | 88 | % | | | | | | | | |
| Realized gains on available-for-sale securities | 10 | | | 393 | | | (383) | | | (97) | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Income from bank-owned life insurance | 416 | | | 456 | | | (40) | | | (9) | | | | | | | | | |
| Swap fees and credit valuation adjustments, net | 155 | | | (9) | | | 164 | | | 1,822 | | | | | | | | | |
| ATM and credit card interchange income | 2,328 | | | 485 | | | 1,843 | | | 380 | | | | | | | | | |
| Other non-interest income | 278 | | | 254 | | | 24 | | | 9 | | | | | | | | | |
| Total non-interest income | $ | 4,144 | | | $ | 2,087 | | | $ | 2,057 | | | 99 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
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 quarter ended March 31, 2021 compared to the same corresponding period in 2020 was driven by a decline in costs associated with our rebate program, including a reduction in the funded balance and reduction in rates used. In addition, customer growth and an increase in outstanding balances improved account analysis fees.
Realized Gains on Available-for-Sale Securities - The decrease for the quarter ended March 31, 2021 was primarily due to the value and volume of the Company’s securities sold in 2020 in the declining rate environment. The 2020 sales were a strategic decision by management to capitalize on attractive market conditions and improve credit quality.
Swap Fee and Credit Valuation Adjustments, Net - This category includes swap fees from the execution of new swaps and the credit valuation adjustment (“CVA”). Swap fees on new swaps depend on the size and term of the underlying asset. During the first quarter of 2021, no new swaps were executed compared to two new swaps for the same period in 2020. The low volume of new swaps was due to management's loan and pricing strategy. Increased rates as of March 31, 2021 played a significant role in the year-over-year increase.
ATM and Credit Card Interchange Income - The increase in ATM and credit card interchange income for the quarter ended March 31, 2021 compared to the same period in 2020 was primarily the result of customers that mobilized their workforce directly impacted by the COVID-19 pandemic. The Company anticipates the credit card activity and related income will decline in connection with a decline in COVID-19 cases and the related vaccine rollout.
Non-Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended |
| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30, 2020(1) | | March 31,
2020 |
| (Dollars in thousands) |
| Total non-interest expense | $ | 22,818 | | | $ | 23,732 | | | $ | 23,011 | | | $ | 31,010 | | | $ | 22,215 | |
Non-interest expense to average assets(2) | 1.60 | % | | 1.71 | % | | 1.67 | % | | 2.21 | % | | 1.80 | % |
(1) Total non-interest expense includes $7 million related to goodwill impairment. |
(2) Interim periods annualized. |
The components of non-interest expense were as follows for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
| | | | | Change | | | | | | |
| 2021 | | 2020 | | $ | | % | | | | | | | | |
| (Dollars in thousands) |
| Salary and employee benefits | $ | 13,553 | | | $ | 14,390 | | | $ | (837) | | | (6) | % | | | | | | | | |
| Occupancy | 2,494 | | | 2,085 | | | 409 | | | 20 | | | | | | | | | |
| Professional fees | 782 | | | 671 | | | 111 | | | 17 | | | | | | | | | |
| Deposit insurance premiums | 1,151 | | | 1,016 | | | 135 | | | 13 | | | | | | | | | |
| Data processing | 716 | | | 692 | | | 24 | | | 3 | | | | | | | | | |
| Advertising | 303 | | | 500 | | | (197) | | | (39) | | | | | | | | | |
| Software and communication | 1,065 | | | 876 | | | 189 | | | 22 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Foreclosed assets, net | 50 | | | 10 | | | 40 | | | 400 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Other non-interest expense | 2,704 | | | 1,975 | | | 729 | | | 37 | | | | | | | | | |
| Total non-interest expense | $ | 22,818 | | | $ | 22,215 | | | $ | 603 | | | 3 | % | | | | | | | | |
| | | | | | | | | | | | | | | |
The changes in noninterest expense were driven by the following:
Salary and Employee Benefits - Salary and employee benefit costs decreased for the quarter ended March 31, 2021 compared to the same period in 2020 primarily due to changes in staffing levels. During the first quarter of 2020, the Company anticipated loan and deposit growth that required an increase in headcount and resulted in increased compensation costs. As result of the COVID-19 pandemic, the Company optimized staffing levels during the second half of 2020 and savings began to materialize in 2021.
Occupancy - Occupancy costs increased for the quarter ended March 31, 2021 compared to the same period in 2020 primarily due to our new locations in the rapidly growing Frisco, Texas market and our more prominent location on the Country Club Plaza, in Kansas City, Missouri.
Professional Fees - Professional fees increased for the quarter ended March 31, 2021 compared to the same corresponding period in 2020 primarily from an increase in legal fees as a result of PPP loans and loan workouts. In addition, the Company’s accounting and third-party consulting fees continue to increase due to asset growth and operation as a public company.
Deposit Insurance Premiums - The FDIC uses a risk-based premium system to calculate quarterly fees. Our premium costs increased for the quarter ended March 31, 2021 compared to the same period in 2020 as a result of strong asset growth, changes in asset quality and changes in capital ratios.
Advertising - The decline in advertising costs was driven by the COVID-19 pandemic that reduced in-person events.
Software and Communication - Software and communication costs increased for the quarter ended March 31, 2021 primarily due to our continued strategy to invest in technologies that allow us to cover beginning-to-end loan originations, provide customers with a suite of online tools and allow us to analyze reporting trends. In addition to the growing number of technologies implemented, a portion of costs increased as a result of our growth.
Other Non-interest Expense - Other non-interest expense increased for the quarter ended March 31, 2021 compared to the same period in 2020 primarily due to a $623 thousand increase in commercial card costs as a result of our growing customer base and increased use as a result of the COVID-19 pandemic. In addition, insured cash sweep (“ICS”) deposits increased in 2021 from 2020, which drove related fees higher by $125 thousand. These changes were partly offset by the Company continuing to realize benefits in 2021 from reduced travel, entertainment and other discretionary spending as a result of the COVID-19 pandemic.
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended |
| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30,
2020 | | March 31,
2020 |
| (Dollars in thousands) |
| Income tax expense (benefit) | $ | 2,908 | | | $ | 1,785 | | | $ | 1,498 | | | $ | (863) | | | $ | 293 | |
| Income (loss) before income taxes | $ | 14,943 | | | $ | 9,879 | | | $ | 9,504 | | | $ | (8,219) | | | $ | 4,150 | |
| Effective tax rate | 19 | % | | 18 | % | | 16 | % | | 10 | % | | 7 | % |
Our income tax expense (benefit) differs from the amount that would be calculated using the federal statutory tax rate, primarily from investments in tax advantaged assets, including bank-owned life insurance, tax-exempt municipal securities and tax credit bonds; state tax credits; and permanent tax differences from goodwill impairment and equity-based compensation. Refer to “Note 10: Income Tax” within the Notes to the Unaudited Financial Statements for more information.
Analysis of Financial Condition
Securities Portfolio
The securities portfolio is maintained to serve as a contingent, on-balance sheet source of liquidity. The objective of the investment portfolio is to optimize earnings, manage credit and interest rate risk, ensure adequate liquidity, and meet pledging and regulatory capital requirements. As of March 31, 2021, available-for-sale investments totaled $685 million, an increase of $31 million from December 31, 2020. For additional information, see “Note 3: Securities” in the Notes to the Unaudited Consolidated Financial Statements.
Loan Portfolio
Refer to “Note 4: Loans and Allowance for Loan Losses (“ALLL”)” within the Notes to the Unaudited Consolidated Financial Statements for additional information regarding the Company’s loan portfolio. As of March 31, 2021, gross loans increased $68 million or 2% from December 31, 2020 and was driven by the following:
PPP - PPP loans increased $44 million or 15% from December 31, 2020 to March 31, 2021. PPP loan activity is detailed in the “First Quarter 2021 Highlights” section within Management’s Discussion and Analysis. The loans are guaranteed by the SBA, earn interest at 1.00%, and include a fee. The PPP loans will decline as the SBA forgives the loans and provides repayment to the Bank. Construction and Land Development - The $54 million or 10% increase was driven by customer drawdowns on lines of credit primarily for commercial projects.
Energy - Our energy portfolio declined $2 million from December 31, 2020 to March 31, 2021. Customers remain impacted by lower oil and natural gas prices that has strained operating cash flow and ability to pay down their lines of credit. The Company expects the energy portfolio to decline further as part of management’s strategy to lower our oil and gas loan concentrations.
Commercial - The $55 million decline in commercial loans was driven by charge-offs taken in the first quarter of 2021, an increase in pay downs and $28 million of loans sold to a third-party. The loans sold were written down to the sales price prior to the sale.
The following table shows the contractual maturities of our gross loans and sensitivity to interest rate changes:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2021 |
| Due in One Year or Less | | Due after One Year through Five Years | | Due after Five Years 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 | $ | 63,678 | | | $ | 329,338 | | | $ | 283,206 | | | $ | 513,545 | | | $ | 20,939 | | | $ | 73,341 | | | $ | — | | | $ | — | | | $ | 1,284,047 | |
| Energy | 52 | | | 193,485 | | | 451 | | | 148,911 | | | — | | | — | | | — | | | — | | | 342,899 | |
| Commercial real estate | 103,513 | | | 139,707 | | | 346,489 | | | 295,986 | | | 47,092 | | | 251,547 | | | — | | | 7,300 | | | 1,191,634 | |
| Construction and land development | 4,411 | | | 75,857 | | | 33,557 | | | 444,016 | | | — | | | 29,768 | | | 6,860 | | | 22,731 | | | 617,200 | |
| Residential and multifamily real estate | 20,344 | | | 112,806 | | | 69,230 | | | 143,924 | | | 110,117 | | | 8,675 | | | 176 | | | 222,621 | | | 687,893 | |
| PPP | — | | | — | | | 336,355 | | | — | | | — | | | — | | | — | | | — | | | 336,355 | |
| Consumer | 16,799 | | | 11,212 | | | 4,767 | | | 12,534 | | | — | | | 15,332 | | | — | | | 2,273 | | | 62,917 | |
| Gross loans | $ | 208,797 | | | $ | 862,405 | | | $ | 1,074,055 | | | $ | 1,558,916 | | | $ | 178,148 | | | $ | 378,663 | | | $ | 7,036 | | | $ | 254,925 | | | $ | 4,522,945 | |
Provision and Allowance for Loan Losses (“ALLL”)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended |
| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30,
2020 | | March 31,
2020 |
| (Dollars in thousands) |
| Provision for loan losses | $ | 7,500 | | | $ | 10,875 | | | $ | 10,875 | | | $ | 21,000 | | | $ | 13,950 | |
| Allowance for loan losses | 74,551 | | | 75,295 | | | 76,035 | | | 71,185 | | | 51,458 | |
| Net charge-offs | $ | 8,244 | | | $ | 11,615 | | | $ | 6,025 | | | $ | 1,273 | | | $ | 19,388 | |
Refer to “Note 4: Loans and Allowance for Loan Losses (“ALLL”)” within the Notes to the Unaudited Consolidated Financial Statements for information regarding the Company’s ALLL process. The ALLL at March 31, 2021 represents our best estimate of the incurred credit losses inherent in the loan portfolio at that date. 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 loan losses as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2021 | | December 31, 2020 |
| Amount | | Percent of Allowance to Total Allowance | | Amount | | Percent of Allowance to Total Allowance |
| (Dollars in thousands) |
| Commercial | $ | 23,464 | | | 32 | % | | $ | 24,693 | | | 33 | % |
| Energy | 20,292 | | | 27 | | | 18,341 | | | 24 | |
| Commercial real estate | 20,609 | | | 28 | | | 22,354 | | | 29 | |
| Construction and land development | 3,837 | | | 5 | | | 3,612 | | | 5 | |
| Residential and multifamily real estate | 6,056 | | | 8 | | | 5,842 | | | 8 | |
| PPP | — | | | — | | | — | | | — | |
| Consumer | 293 | | | — | | | 453 | | | 1 | |
| Gross loans | $ | 74,551 | | | 100 | % | | $ | 75,295 | | | 100 | % |
Activity in the allowance for loan losses is presented in the following table:
| | | | | | | | | | | | | | | | |
| Three Months Ended | | | |
| March 31, | | | |
| 2021 | | 2020 | | | | | |
| (Dollars in thousands) |
| Allowance for loan losses: | | | | | | | | |
| Balance at beginning of period | $ | 75,295 | | | $ | 56,896 | | | | | | |
| Provision for loan losses | 7,500 | | | 13,950 | | | | | | |
| Charge-offs: | | | | | | | | |
| Commercial | (8,266) | | | (18,077) | | | | | | |
| Energy | — | | | (1,279) | | | | | | |
| Commercial real estate | — | | | — | | | | | | |
| Construction and land development | — | | | — | | | | | | |
| Residential and multifamily real estate | — | | | — | | | | | | |
| | | | | | | | |
| Consumer | — | | | (104) | | | | | | |
| Total charge-offs | (8,266) | | | (19,460) | | | | | | |
| Recoveries: | | | | | | | | |
| Commercial | 22 | | | 71 | | | | | | |
| Energy | — | | | — | | | | | | |
| Commercial real estate | — | | | — | | | | | | |
| Construction and land development | — | | | — | | | | | | |
| Residential and multifamily real estate | — | | | — | | | | | | |
| | | | | | | | |
| Consumer | — | | | 1 | | | | | | |
| Total recoveries | 22 | | | 72 | | | | | | |
| Net charge-offs | (8,244) | | | (19,388) | | | | | | |
| Balance at end of period | $ | 74,551 | | | $ | 51,458 | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
|
A discussion of the changes in the ALLL is provided below:
Charge-offs and Recoveries:
During the three-months ended March 31, 2021, charge-offs primarily related to two commercial borrowers that were unable to support their debt obligations. The $8 million charged-off was greater than the reserved balance in the ALLL at December 31, 2020 resulting in a $5 million increase in the provision during the quarter ended March 31, 2021.
For the quarter ended March 31, 2020, net charge-offs included an $18 million charge-off related to a previously disclosed non-performing, commercial loan. The commercial loan had a specific reserve associated with it as of December 31, 2019, resulting in a limited impact to the first quarter 2020 provision. In addition, the Company charged off $1 million related to one oil exploration and production credit.
The below table provides the ratio of net charge-offs (recoveries) during the period to average loans outstanding based on our loan categories:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended(1) |
| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30,
2020 | | March 31,
2020 |
| Commercial | 2.47 | % | | 2.07 | % | | 1.72 | % | | 0.03 | % | | 5.37 | % |
| Energy | — | | | 3.16 | | | — | | | 1.04 | | | 1.27 | |
| Commercial real estate | — | | | 0.53 | | | — | | | — | | | — | |
| Construction and land development | — | | | — | | | — | | | — | | | — | |
| Residential and multifamily real estate | — | | | (0.02) | | | 0.18 | | | 0.15 | | | — | |
| PPP | — | | | — | | | — | | | — | | | — | |
| Consumer | — | | | — | | | (0.09) | | | (0.01) | | | 0.93 | |
| Total net charge-offs to average loans | 0.74 | % | | 1.03 | % | | 0.54 | % | | 0.12 | % | | 2.00 | % |
(1) Interim periods annualized. |
Impact of Risk Rating and Loss Ratio Changes:
Loans risk rated “special mention” and “accruing, substandard” that are not TDRs declined $38 million between December 31, 2020 and March 31, 2021 resulting in a $2 million decrease to the required reserve. The decline was driven by two commercial loans partially charged-off, discussed above, totaling $28 million that were sold in the first quarter of 2021. In addition, several loan upgrades were made due to an improving economy.
The commercial loan portfolio saw increased charge-offs over the past several quarters. The charge-offs impacted the commercial loan historical loss factor that resulted in an $860 thousand increase to the required reserve during the first quarter of 2021.
Impaired Loans and Other Factors:
Impaired loans declined $13 million between December 31, 2020 and March 31, 2021, driven by an $8 million loan upgraded due to an increase in capital that reduced the ALLL by $1 million and a $5 million decline as a result of payments made by several borrowers that reduced the ALLL by $1 million. The reduction in the ALLL was offset by an increase of $2 million as a result of changes in underlying collateral values.
Nonperforming Assets and Other Asset Quality Metrics
Nonperforming assets include: (i) nonperforming loans - includes non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings (“TDRs”) that are not performing in accordance with their modified terms; (ii) foreclosed assets held for sale; (iii) repossessed assets; and (iv) impaired securities.
Nonaccrual loans declined $12 million during the quarter ended March 31, 2021 primarily due to one commercial real estate loan that recapitalized its balance sheet and was placed back on accrual. In addition, several commercial borrowers were able to pay down a portion of the outstanding loan balance during the quarter ended March 31, 2021. Nonaccrual energy loans increased slightly between December 31, 2020 and March 31, 2021 as oil and natural gas borrowers struggled from the effects of low oil and gas prices over the past year. We anticipate improving credit metrics over the next quarter as the economy rebounds.
During 2020, nonaccrual loans increased primarily from energy loans that did not meet the criteria to be modified under the CARES Act and several loans impacted by the COVID-19 pandemic.
The table below summarizes our nonperforming assets and related ratios as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Quarter Ended |
| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30,
2020 | | March 31,
2020 |
| (Dollars in thousands) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
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| | | | | | | | | |
| | | | | | | | | |
| Nonaccrual loans | $ | 63,319 | | | $ | 75,051 | | | $ | 75,560 | | | $ | 37,534 | | | $ | 26,255 | |
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| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Loans past due 90 days or more and still accruing | 3,183 | | | 1,024 | | | 4,324 | | | 220 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total nonperforming loans | 66,502 | | | 76,075 | | | 79,884 | | | 37,754 | | | 26,255 | |
| Foreclosed assets held for sale | 2,347 | | | 2,347 | | | 2,349 | | | 2,502 | | | 3,619 | |
| | | | | | | | | |
| | | | | | | | | |
| Total nonperforming assets | $ | 68,849 | | | $ | 78,422 | | | $ | 82,233 | | | $ | 40,256 | | | $ | 29,874 | |
| ALLL to total loans | 1.65 | % | | 1.70 | % | | 1.70 | % | | 1.61 | % | | 1.29 | % |
| ALLL to nonaccrual loans | 117.74 | | | 100.33 | | | 100.63 | | | 189.66 | | | 195.99 | |
| ALLL to nonperforming loans | 112.10 | | | 98.98 | | | 95.18 | | | 188.55 | | | 195.99 | |
| Nonaccrual loans to total loans | 1.40 | | | 1.69 | | | 1.68 | | | 0.85 | | | 0.66 | |
| Nonperforming loans to total loans | 1.48 | | | 1.71 | | | 1.78 | | | 0.86 | | | 0.66 | |
| Nonperforming assets to total assets | 1.15 | % | | 1.39 | % | | 1.49 | % | | 0.74 | % | | 0.59 | % |
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Other asset quality metrics management reviews include loans past due 30 - 89 days and classified loans. The Company defines classified loans as loans categorized as substandard - performing, substandard - nonperforming, doubtful, or loss. The definitions of substandard, doubtful and loss are provided in “Note 4 Loans and Allowance for Loan Losses” in the Notes to the Unaudited Consolidated Financial Statements. The following table summarizes our loans past due 30 - 89 days, classified assets and related ratios as of the dates indicated:
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| March 31,
2021 | | December 31,
2020 | | September 30,
2020 | | June 30,
2020 | | March 31,
2020 |
| (Dollars in thousands) |
| Loan Past Due Detail | | | | | | | | | |
| 30 - 59 days past due | $ | 10,583 | | | $ | 10,137 | | | $ | 15,324 | | | $ | 14,205 | | | $ | 12,934 | |
| 60 - 89 days past due | 403 | | | 7,941 | | | 30,027 | | | 20,676 | | | 6,604 | |
| Total 30 - 89 days past due | $ | 10,986 | | | $ | 18,078 | | | $ | 45,351 | | | $ | 34,881 | | | $ | 19,538 | |
| Loans 30 - 89 days past due / gross loans | 0.24 | % | | 0.41 | % | | 1.01 | % | | 0.79 | % | | 0.49 | % |
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| Classified Loans | | | | | | | | | |
| Substandard - performing | $ | 205,560 | | | $ | 211,008 | | | $ | 224,352 | | | $ | 199,595 | | | $ | 80,876 | |
| Substandard - nonperforming | 57,967 | | | 70,734 | | | 67,765 | | | 29,030 | | | 19,555 | |
| Doubtful | 5,352 | | | 4,315 | | | 7,794 | | | 8,504 | | | 4,088 | |
| Loss | — | | | — | | | — | | | — | | | — | |
| Total classified loans | 268,879 | | | 286,057 | | | 299,911 | | | 237,129 | | | 104,519 | |
| Foreclosed assets held for sale | 2,347 | | | 2,347 | | | 2,349 | | | 2,502 | | | 3,619 | |
| Total classified assets | $ | 271,226 | | | $ | 288,404 | | | $ | 302,260 | | | $ | 239,631 | | | $ | 108,138 | |
Classified loans / (total capital + ALLL) | 38.2 | % | | 40.9 | % | | 43.2 | % | | 34.9 | % | | 15.8 | % |
Classified assets / (total capital + ALLL) | 38.6 | % | | 41.2 | % | | 43.6 | % | | 35.3 | % | | 16.3 | % |
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During the quarter ended March 31, 2021, past due loans between 30 to 89 days declined primarily due to a commercial real estate loan that was recapitalized, which allowed the borrower to pay all past due amounts. Loans past due between 30 and 89 days at March 31, 2021 included a $6 million commercial loan and several smaller loans.
The Company's classified assets as of March 31, 2021 decreased $17 million since December 31, 2020. The decline was driven by $30 million of commercial and commercial real estate loans upgraded due to improvements in the borrowers’ capital structure and $8 million in pay downs from classified loans, offset by an increase of approximately $21 million in downgraded loans, primarily from our energy and commercial loan portfolio.
Deposits and Other Borrowings
The following table sets forth the maturity of time deposits as of March 31, 2021:
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| As of March 31, 2021 |
| 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 | $ | 111,656 | | | $ | 103,081 | | | $ | 63,493 | | | $ | 44,464 | | | $ | 322,694 | |
| Time deposits below FDIC insurance limit | 198,577 | | | 141,545 | | | 145,496 | | | 123,479 | | | 609,097 | |
| Total | $ | 310,233 | | | $ | 244,626 | | | $ | 208,989 | | | $ | 167,943 | | | $ | 931,791 | |
At March 31, 2021, our deposits totaled $5 billion, an increase of $357 million or 8% from December 31, 2020. Of this increase, $76 million were noninterest-bearing deposits and $392 million were money market, NOW and savings deposits. Deposit increases were driven by a customer relationship that mobilized their workforce directly impacted by the COVID-19 pandemic. The increases were offset by a $112 million decrease in time deposits between December 31, 2020 to March 31, 2021 as a result of maturities and the current interest rate environment.
Other borrowings include repurchase agreements, fed funds purchased, FHLB advances, and our trust preferred security. At March 31, 2021, other borrowings totaled $287 million, a $9 million or 3% decrease from December 31, 2020. The decline was driven by borrowings that matured and were not replaced during the quarter due to increased Company liquidity.
As of March 31, 2021, the Company had approximately $3 billion of uninsured deposits, which is an estimated amount based on the same methodologies and assumptions used for the bank’s regulatory requirements. The Company believes that its current capital ratios and liquidity are sufficient to mitigate the risks of uninsured deposits.
As of March 31, 2021, the Company had approximately $600 million of deposits with one customer relationship. The Company evaluated the deposit concentration and determined that a significant reduction to these deposits would not adversely impact the Company as sufficient liquidity is accessible and at favorable rates.
Liquidity
The Company’s liquidity strategy is to maintain adequate, but not excessive, liquidity to meet the daily cash flow needs of its clients while attempting to achieve adequate earnings for its stockholders. The liquidity position is monitored continuously by the Company’s finance department. Liquidity resources can be derived from two sources: (i) on-balance sheet liquidity resources, which represent funds currently on the balance sheet and (ii) off-balance sheet liquidity resources, which represent funds available from third-party sources. Our on-balance sheet and off-balance sheet liquidity resources consisted of the following as of the dates indicated:
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| March 31, 2021 | | December 31, 2020 |
| (Dollars in thousands) |
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| Total on-balance sheet liquidity | $ | 1,304,002 | | | $ | 1,046,110 | |
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| Total off-balance sheet liquidity | 748,177 | | | 756,325 | |
| Total liquidity | $ | 2,052,179 | | | $ | 1,802,435 | |
| On-balance sheet liquidity as a percent of assets | 22 | % | | 19 | % |
| Total liquidity as a percent of assets | 34 | % | | 32 | % |
The Company believes that its current liquidity will be sufficient to meet anticipated cash requirements for the next 12 months.
Contractual Obligations
In the first quarter of 2021, the Company entered into an agreement with a third-party, venture capital firm. The Company will invest up to $3 million into the venture capital fund. The fund was designed to invest in companies that solve problems for community banks and help accelerate technology adoption for community banks.
Refer to “Note 6: Time Deposits and Borrowings” within the Notes to the Unaudited Consolidated Financial Statements for our significant contractual cash obligations to third parties. In addition, the Company has various lease agreements with approximately $30 million of future minimum lease payments at March 31, 2021.
Contractual obligations may be satisfied through our on-balance sheet and off-balance sheet liquidity discussed above.
Capital Resources and Off-Balance Sheet Arrangements
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The regulatory capital requirements involve quantitative measures of the Company’s assets, liabilities, select off-balance sheet items and equity. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Refer to “Note 8: Regulatory Matters” in the Notes to the Unaudited Consolidated Financial Statements for additional information. Management believes that as of March 31, 2021, the Company and the bank met all capital adequacy requirements to which they are subject.
The Company is subject to off-balance sheet risk in the normal course of business to meet the needs of its clients that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Refer to “Note 12: Commitments and Credit Risk” in the Notes to Unaudited Consolidated Financial Statements for a breakout of our off-balance sheet arrangements. As of March 31, 2021, the Company believes it has sufficient access to liquid assets to support the funding of these commitments.
Critical Accounting Policies and Estimates
The Company identified several accounting policies that are critical to an understanding of our financial condition and results of operations. These policies require difficult, subjective or complex judgments and assumptions that create potential sensitivity of our financial statements to those judgments and assumptions. These policies relate to the allowance for loan and lease losses, investment securities impairment, deferred tax assets, and the fair value of financial instruments. A discussion of these policies can be found in the section captioned “Critical Accounting Policies and Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Form 10-K.
There have been no additional changes in the Company’s application of critical accounting policies since December 31, 2020.
Recent Accounting Pronouncements
Refer to “Note 1: Nature of Operations and Summary of Significant Accounting Policies” included in the Notes to the Unaudited Consolidated Financial Statements included elsewhere in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
A primary component of market risk is interest rate volatility. Interest rate risk management is a key element of the Company’s balance sheet management. Interest rate risk is the risk that NIM will erode over time due to changing market conditions. Many factors can cause margins to erode: (i) lower loan demand; (ii) increased competition for funds; (iii) weak pricing policies; (iv) balance sheet mismatches; and (v) changing liquidity demands. The objective is to maximize income while minimizing interest rate risk. The Company manages its sensitivity position using its interest rate risk policy. The management of interest rate risk is a three-step process and involves: (i) measuring the interest rate risk position; (ii) policy constraints; and (iii) strategic review and implementation.
Our exposure to interest rate risk is managed by the Funds Management Committee (“FMC”). The FMC uses a combination of three systems to measure the balance sheet’s interest rate risk position. The three systems in combination are expected to provide a better overall result than a single system alone. The three systems include: (i) gap reports; (ii) earnings simulation; and (iii) economic value of equity. The FMC’s primary tools to change the interest rate risk position are: (i) investment portfolio duration; (ii) deposit and borrowing mix; and (iii) on balance sheet derivatives.
The FMC evaluates interest rate risk using a rate shock method and rate ramp method. In a rate shock analysis, rates change immediately and the change is sustained over the time horizon. In a rate ramp analysis, rate changes occur gradually over time. The following tables summarize the simulated changes in net interest income and fair value of equity over a 12-month horizon using a rate shock and rate ramp method as of the dates indicated:
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| Hypothetical Change in Interest Rate - Rate Shock |
| March 31, 2021 | | March 31, 2020 |
Change in Interest Rate
(Basis Points) | Percent change in net interest income | | Percent change in fair value of equity | | Percent change in net interest income | | Percent change in fair value of equity |
| +300 | 0.7 | % | | (12.2) | % | | 8.1 | % | | (4.5) | % |
| +200 | (0.1) | | | (7.5) | | | 5.7 | | | (0.7) | |
| +100 | (0.6) | | | (3.6) | | | 2.9 | | | 1.2 | |
| Base | — | % | | — | % | | — | % | | — | % |
| -100 | NA(1) | | NA(1) | | NA(1) | | NA(1) |
| -200 | NA(1) | | NA(1) | | NA(1) | | NA(1) |
(1) The Company decided to exclude the down rate environment from its analysis due to the already low interest rate environment. |
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| Hypothetical Change in Interest Rate - Rate Ramp | | |
| March 31, 2021 | | | | March 31, 2020 | | |
Change in Interest Rate
(Basis Points) | Percent change in net interest income | | | | Percent change in net interest income | | |
| +300 | 0.3 | % | | | | 4.8 | % | | |
| +200 | (0.2) | | | | | 3.2 | | | |
| +100 | (0.4) | | | | | 1.6 | | | |
| Base | — | | | | | — | | | |
| -100 | NA(1) | | | | NA(1) | | |
| -200 | 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. |
The Company’s position is relatively neutral as of March 31, 2021. The hypothetical change in net interest income as of March 31, 2021 in an up 100 and 200 basis point shock is mainly due to floors on variable rate loans that limit interest income growth as rates start to rise and the number of fixed-rate PPP loans outstanding. In addition, the Company reduced wholesale deposits and time deposits to lower interest rate sensitivity in the current low rate environment. As a result, our interest-bearing liabilities reprice faster than our earning assets in an up 100 and 200 basis point rate environment. The FMC has several options available, including an increase in fixed-rate deposits and using on balance sheet derivatives, that could reduce the short-term, negative impact of a rising interest rate environment. The Company expects that forgiveness of our PPP loans over the near term may improve net interest income if rates were to increase. Approximately 67% of the Company’s earning assets reprice or mature over the new 12 months.
The models the Company uses include assumptions regarding interest rates while balances remain unchanged. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions, customer behavior and management strategies, among other factors.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of March 31, 2021. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2021.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the first quarter of 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our business, financial condition, results of operations, cash flows or growth prospects. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our 2020 Form 10-K, which could materially affect our business, financial condition or results of operations in future periods. There were no material changes from the risk factors disclosed in the 2020 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share Repurchase Program
The following table summarizes our repurchases of our common shares for the three-months ended March 31, 2021:
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| Calendar Month | | Total Number of Shares Repurchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value of Shares that may yet be Purchased as Part of Publicly Announced Plans or Programs |
| January 1 - 31 | | 52,855 | | | $ | 10.84 | | | 52,855 | | | $ | 13,382,774 | |
| February 1 - 28 | | — | | | $ | — | | | — | | | $ | 13,382,774 | |
| March 1 - 31 | | 35,642 | | | $ | 13.38 | | | 35,642 | | | $ | 12,905,314 | |
| Total | | 88,497 | | | $ | 11.87 | | | 88,497 | | | |
On October 20, 2020, the Company announced that its Board of Directors approved a share repurchase program under which the Company may repurchase up to $20 million of its common stock. Repurchases under the program may be made in open market or privately negotiated transactions in compliance with SEC Rule 10b-18, subject to market conditions, applicable legal requirements and other relevant factors. The program does not obligate the Company to acquire any particular 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.
ITEM 6. EXHIBITS
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| Exhibit Number | | Exhibit Description | | | | | | |
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| 101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | |
| 101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | | | |
| 101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | |
| 101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | |
| 101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | |
| 101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | |
| 104* | | Cover Page Interactive Data File (formation in Inline XBRL and contained in Exhibit 101) | | | | | | |
* Filed Herewith
** Furnished Herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | CrossFirst Bankshares Inc. |
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| May 6, 2021 | | | | | | /s/ David L. O’Toole |
| | | | | | | | | David L. O’Toole |
| | | | | | | | | Chief Financial Officer |
| | | | | | | | | (Principal Financial Officer and Principal Accounting Officer) |
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