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UNITED STATES
SECURITIES AND
 
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
10-Q
 
☒
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
March 31, 2023
 
or
☐
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to
 
______
Commission file number
001-39028
 
CROSSFIRST BANKSHARES, INC.
 
(Exact Name of Registrant as Specified in its Charter)
Kansas
26-3212879
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
11440 Tomahawk Creek Parkway
Leawood
,
KS
66211
(Address of principal executive offices)
(Zip Code)
(
913
)
901-4516
 
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
 
last report)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
CFB
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required
 
to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
 
reports), and
(2) has been subject to such filing requirements for the past 90 days.
 
Yes
 
☒
 
No
 
☐
Indicate by check mark whether the registrant has submitted electronically
 
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
 
for such shorter period that the registrant
was required to submit such files).
 
Yes
 
☒
 
No
 
☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
 
filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
 
“large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☒
If an emerging growth company, indicate by check mark if the registrant has elected not
 
to use the extended transition period for
complying with any new or revised financial accounting standards provided
 
pursuant to Section 13(a) of the Exchange Act.
 
☐
 
Indicate by check mark whether the registrant is a shell company (as defined
 
in Rule 12b-2 of the Exchange Act). Yes
 
☐
 
No
 
☒
As of April 28, 2023, the registrant had
48,600,618
 
shares of common stock, par value $0.01, outstanding.
 
 
3
Forward-Looking Information
All statements contained in this quarterly report on Form 10-Q that do not directly
 
and exclusively relate to historical facts
constitute forward-looking statements. These statements are often, but not always, made
 
through the use of words or phrases such as
“may,” “might,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,”
 
“will,” “anticipate,” “seek,” “estimate,” “intend,”
“plan,” “projection,” “goal,” “target,” “outlook,” “aim,” “would,”
 
“annualized,” “position” and “outlook,” or the negative of these words
or other comparable words or phrases of a future or forward-looking nature.
 
For example, our forward-looking statements include
statements regarding our expectations, opportunities or plans for growth;
 
the proposed acquisition of Canyon Bancorporation, Inc. and
Canyon Community Bank, N.A. (collectively “Canyon”); our anticipated
 
expenses, cash requirements and sources of liquidity; and our
capital allocation strategies and plans.
Unless we state otherwise or the context otherwise requires, references
 
below to “we,” “our,” “us,” 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.
These forward-looking statements are not historical facts, and are based
 
on current expectations, estimates and projections about
our industry, management’s beliefs and certain assumptions made by management,
 
many of which, by their nature, are inherently
uncertain and beyond our control. Accordingly, the Company cautions 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 the
Company believes that the expectations reflected in these forward-looking
 
statements are reasonable as of the date made, actual results
may prove to be materially different from the results expressed or
 
implied by the forward-looking statements due to a number of factors,
including, without limitation: impacts on us and our clients of a decline in general
 
business and economic conditions and any regulatory
responses thereto, including uncertainty and volatility in the financial markets; interest
 
rate fluctuations; our ability to effectively
execute our growth strategy and manage our growth, including identifying
 
and consummating suitable mergers and acquisitions,
entering new lines of business or offering new or enhanced services or
 
products; the transition away from the London Interbank Offered
Rate (“LIBOR”); fluctuations in fair value of our investments due to factors outside
 
of our control; our ability to successfully manage
credit risk and the sufficiency of our allowance; geographic concentration
 
of our markets; economic impact on our commercial real
estate and commercial-based loan portfolios, including declines in
 
commercial and residential real estate values; an increase in non-
performing assets; our ability to attract, hire and retain key personnel; maintaining
 
and increasing customer deposits, funding
availability, liquidity and our ability to raise and maintain sufficient
 
capital; competition from banks, credit unions and other financial
services providers; the effectiveness of our risk management framework;
 
accounting estimates; our ability to maintain effective internal
control over financial reporting; our ability to keep pace with technological changes;
 
cyber incidents or other failures, disruptions or
security breaches; employee error, fraud committed against the Company
 
or our clients, or incomplete or inaccurate information about
clients and counterparties; mortgage markets; our ability to maintain our reputation;
 
costs and effects of litigation; environmental
liability; risk exposure from transactions with financial counterparties; severe
 
weather, natural disasters, pandemics or other external
events; changes in laws, rules, regulations, interpretations or policies relating
 
to financial institutions, including capital requirements,
higher FDIC insurance premiums and assessments, consumer protection
 
laws and privacy laws; volatility in our stock price; issuance of
our preferred stock; risks inherent with proposed business acquisitions
 
and the failure to achieve projected synergies; or other external
events.
 
Additional discussion of these and other risk factors can be found in our Annual Report on Form 10-K for the fiscal year
 
ended
December 31, 2022 (“2022 Form 10-K),
 
filed with the Securities and Exchange Commission (“SEC”) on March 3, 2023, and
 
in our
other filings with the SEC.
 
Except as required by law, the Company undertakes no obligation to
 
update or revise forward-looking statements to reflect
changed assumptions, the occurrence of unanticipated events or changes
 
in our business, results of operations or financial condition over
time. Given these risks and uncertainties, readers are cautioned not to place undue
 
reliance on such forward-looking statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements – Unaudited
4
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Financial Condition – Unaudited
March 31, 2023
December 31, 2022
(Dollars in thousands)
Assets
Cash and cash equivalents
$
262,971
$
300,138
Available-for-sale securities - taxable
280,408
198,808
Available-for-sale securities - tax-exempt
470,843
488,093
Loans, net of unearned fees
5,647,639
5,372,729
Allowance for credit losses on loans
65,130
61,775
Loans, net of the allowance for credit losses on loans
5,582,509
5,310,954
Premises and equipment, net
67,311
65,984
Restricted equity securities
16,700
12,536
Interest receivable
30,385
29,507
Foreclosed assets held for sale
855
1,130
Goodwill and other intangible assets, net
28,259
29,081
Bank-owned life insurance
69,511
69,101
Other
84,978
95,754
Total assets
$
6,894,730
$
6,601,086
Liabilities and stockholders’ equity
Deposits
Non-interest-bearing
$
969,701
$
1,400,260
Savings, NOW and money market
3,491,586
3,305,481
Time
1,376,027
945,567
Total deposits
5,837,314
5,651,308
Federal Home Loan Bank advances
314,031
218,111
Other borrowings
17,970
35,457
Interest payable and other liabilities
79,924
87,611
Total liabilities
6,249,239
5,992,487
Stockholders’ equity
Preferred stock, $
0.01
 
par value:
 
Authorized -
15,000
 
shares, issued -
7,750
 
and
no
shares at March 31, 2023 and December 31, 2022, respectively
-
-
Common stock, $
0.01
 
par value:
 
Authorized -
200,000,000
 
shares, issued -
53,189,016
 
and
53,036,613
 
shares at March 31, 2023 and December 31, 2022,
respectively
532
530
Treasury stock, at cost:
 
4,588,398
 
shares held at March 31, 2023 and December 31,
2022
(64,127)
(64,127)
Additional paid-in capital
539,023
530,658
Retained earnings
222,203
206,095
Accumulated other comprehensive loss
(52,140)
(64,557)
Total stockholders’ equity
645,491
608,599
Total liabilities and stockholders’ equity
$
6,894,730
$
6,601,086
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements – Unaudited
5
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Operations – Unaudited
Three Months Ended
March 31,
2023
2022
(Dollars in thousands except per share data)
Interest Income
Loans, including fees
$
89,618
$
42,728
Available-for-sale securities - taxable
1,849
1,044
Available-for-sale securities - tax-exempt
3,794
3,692
Deposits with financial institutions
2,014
152
Dividends on bank stocks
262
144
Total interest income
97,537
47,760
Interest Expense
Deposits
36,725
3,511
Fed funds purchased and repurchase agreements
46
-
Federal Home Loan Bank Advances
2,391
1,109
Other borrowings
154
25
Total interest expense
39,316
4,645
Net Interest Income
58,221
43,115
Provision for Credit Losses
4,421
(625)
Net Interest Income after Provision for Credit Losses
53,800
43,740
Non-Interest Income
 
 
Service charges and fees on customer accounts
1,829
1,408
ATM and credit card interchange income
1,264
2,664
Realized gains (losses) on available-for-sale securities
63
(26)
Gain on sale of loans
187
-
Gains (losses), net on equity securities
10
(103)
Income from bank-owned life insurance
411
388
Swap fees and credit valuation adjustments, net
90
118
Other non-interest income
567
493
Total non-interest income
4,421
4,942
Non-Interest Expense
Salaries and employee benefits
22,622
17,941
Occupancy
2,974
2,493
Professional fees
2,618
805
Deposit insurance premiums
1,531
737
Data processing
1,242
812
Advertising
752
692
Software and communication
1,651
1,270
Foreclosed assets, net
149
(53)
Other non-interest expense
3,731
2,950
Core deposit intangible amortization
822
19
Total non-interest expense
38,092
27,666
Net Income Before Taxes
20,129
21,016
Income tax expense
4,021
4,188
Net Income
$
16,108
16,828
Basic Earnings Per Common Share
$
0.33
$
0.33
Diluted Earnings Per Common Share
$
0.33
$
0.33
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements – Unaudited
6
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Comprehensive Income (Loss) – Unaudited
Three Months Ended
March 31,
2023
2022
(Dollars in thousands)
Net Income
$
16,108
$
16,828
Other Comprehensive Income (Loss)
Unrealized gain (loss) on available-for-sale securities
14,951
(58,956)
Less: income tax expense (benefit)
3,657
(14,433)
Unrealized gain (loss) on available-for-sale securities, net of income tax
11,294
(44,523)
Reclassification adjustment for realized gains (losses) included in income
63
(26)
Less: income tax expense (benefit)
15
(6)
Less: reclassification adjustment for realized gain (loss) included
 
in income, net of income tax
48
(20)
Unrealized gain on cash flow hedges
1,540
2,655
Less: income tax expense
369
653
Unrealized gain on cash flow hedges, net of income tax
1,171
2,002
Other comprehensive income (loss)
12,417
(42,501)
Comprehensive Income (Loss)
$
28,525
$
(25,673)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements – Unaudited
7
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Stockholders’ Equity – Unaudited
Preferred Stock
Common Stock
Treasury
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shares
Amount
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2021
-
$
-
50,450,045
$
526
$
(28,347)
$
526,806
$
147,099
$
21,489
$
667,573
Adoption of ASU 2016-13
-
-
-
-
-
-
(2,610)
-
(2,610)
Net income
-
-
-
-
-
-
16,828
-
16,828
Other comprehensive loss
 
- available-for-
sale securities
-
-
-
-
-
-
-
(44,503)
(44,503)
Other comprehensive gain
 
- cash flow
hedges
-
-
-
-
-
-
-
2,002
2,002
Issuance of shares from equity-based
awards
-
-
336,540
3
-
(453)
-
-
(450)
Open market common share repurchases
-
-
(1,058,332)
-
(16,762)
-
-
-
(16,762)
Employee receivables from sale of stock
-
-
-
-
-
-
6
-
6
Stock-based compensation
-
-
-
-
-
1,115
-
-
1,115
Balance at March 31, 2022
-
$
-
49,728,253
$
529
$
(45,109)
$
527,468
$
161,323
$
(21,012)
$
623,199
Preferred Stock
Common Stock
Treasury
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Shares
Amount
Shares
Amount
(Dollars in thousands)
Balance at December 31, 2022
-
$
-
48,448,215
$
530
$
(64,127)
$
530,658
$
206,095
$
(64,557)
$
608,599
Net income
-
-
-
-
-
-
16,108
-
16,108
Other comprehensive gain
 
- available-for-
sale securities
-
-
-
-
-
-
-
11,246
11,246
Other comprehensive gain
 
- cash flow
hedges
-
-
-
-
-
-
-
1,171
1,171
Issuance of preferred shares
7,750
-
-
-
-
7,750
-
-
7,750
Issuance of shares from equity-based awards
-
-
152,403
2
-
(623)
-
-
(621)
Stock-based compensation
-
-
-
-
-
1,238
-
-
1,238
Balance March 31, 2023
7,750
$
-
48,600,618
$
532
$
(64,127)
$
539,023
$
222,203
$
(52,140)
$
645,491
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See Notes to Consolidated Financial Statements – Unaudited
8
CROSSFIRST BANKSHARES, INC.
Consolidated Statements of Cash Flows – Unaudited
Three Months Ended
March 31,
2023
2022
(Dollars in thousands)
Operating Activities
Net income
$
16,108
$
16,828
Adjustment to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
2,318
1,241
Provision for credit losses
4,421
(625)
Accretion of discounts on loans
(547)
-
Accretion of discounts and amortization of premiums on securities
926
1,116
Equity based compensation
1,238
1,115
(Gain) loss on disposal of fixed assets
(4)
13
Loss (gain) on sale of foreclosed assets and related impairments
102
(62)
Gain on sale of loans
(187)
-
Deferred income taxes
1,640
3,358
Net increase in bank owned life insurance
(411)
(388)
Net realized (gains) losses on available-for-sale securities
(63)
26
Dividends on FHLB stock
(261)
(142)
Changes in:
Interest receivable
(878)
(910)
Other assets
2,615
14,565
Other liabilities
(2,693)
(21,650)
Net cash provided by operating activities
24,324
14,485
Investing Activities
Net change in loans
(275,817)
(94,437)
Purchases of available-for-sale securities
(93,488)
(49,138)
Proceeds from maturities of available-for-sale securities
5,714
11,582
Proceeds from sale of available-for-sale securities
37,069
-
Proceeds from the sale of foreclosed assets
173
237
Purchase of premises and equipment
(2,662)
(962)
Proceeds from the sale of premises and equipment and related insurance claims
4
13
Purchase of restricted equity securities
(8,226)
-
Proceeds from sale of restricted equity securities
4,334
1,544
Net cash used in investing activities
(332,899)
(131,161)
Financing Activities
Net (decrease) increase in demand deposits, savings, NOW and money market accounts
(244,454)
50,403
Net increase (decrease) in time deposits
430,407
(112,320)
Net decrease in federal funds sold
(20,000)
-
Repayment of Federal Home Loan Bank advances
(12,643)
(10,000)
Net proceeds of Federal Home Loan Bank line of credit
110,969
-
Proceeds from issuance of preferred shares, net of issuance cost
7,750
-
Issuance of common shares, net of issuance cost
2
170
Proceeds from employee stock purchase plan
167
172
Repurchase of common stock
-
(16,762)
Acquisition of common stock for tax withholding obligations
(790)
(793)
Net decrease in employee receivables
-
6
Net cash provided by (used in) financing activities
271,408
(89,124)
Decrease in Cash and Cash Equivalents
(37,167)
(205,800)
Cash and Cash Equivalents, Beginning of Period
300,138
482,727
Cash and Cash Equivalents, End of Period
$
262,971
$
276,927
Supplemental Cash Flows Information
Interest paid
35,459
4,784
Income taxes paid
24
-
 
 
 
 
9
CROSSFIRST BANKSHARES, INC.
Notes to Consolidated Financial Statements – Unaudited
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
CrossFirst Bankshares, Inc. (the “Company”) is a bank holding company whose principal activities
 
are the ownership and
management of its wholly-owned subsidiary, CrossFirst Bank (the
 
“Bank”). In addition, the Bank has
three
 
subsidiaries including
CrossFirst Investments, Inc. (“CFI”), which holds investments in marketable
 
securities, CFBSA I, LLC and CFBSA II, LLC.
The Bank is primarily engaged in providing a full range of banking and financial
 
services to individual and corporate customers
through its branches in: (i) Leawood, Kansas; (ii) Wichita, Kansas; (iii) Kansas City, Missouri;
 
(iv) Oklahoma City, Oklahoma; (v)
Tulsa, Oklahoma; (vi) Dallas, Texas; (vii) Fort Worth, Texas; (viii) Frisco, Texas; (ix) Phoenix, Arizona; (x) Colorado Springs,
Colorado; (xi) Denver, Colorado; and (xii) Clayton, New Mexico.
Basis of Presentation
The accompanying interim unaudited consolidated financial statements serve
 
to update the CrossFirst Bankshares, Inc. Annual
Report on Form 10-K for the year ended December 31, 2022 and include the accounts of
 
the Company, the Bank, CFI, CFBSA I, LLC
and CFBSA II, LLC. The accompanying unaudited consolidated financial statements have been prepared in accordance with
 
U.S.
generally accepted accounting principles (“GAAP”) and where applicable,
 
with general practices in the banking industry or guidelines
prescribed by bank regulatory agencies. However, they may not include
 
all information and notes necessary to constitute a complete set
of financial statements under GAAP applicable to annual periods and accordingly should be read
 
in conjunction with the financial
information contained in the Company's most recent Annual Report on Form 10-K. The unaudited consolidated financial
 
statements
reflect all adjustments which are, in the opinion of management, necessary for a fair
 
statement of the results presented. All such
adjustments are of a normal recurring nature. All significant intercompany balances and transactions have
 
been eliminated in
consolidation. Certain reclassifications of prior years' amounts are made whenever
 
necessary to conform to current period presentation.
The results of operations for the interim period are not necessarily indicative of the
 
results that may be expected for the full year or any
other interim period. All amounts are in thousands, except share data, or as otherwise noted.
GAAP requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and
 
expenses, and
disclosures of contingent assets and liabilities. By their nature, estimates are based on
 
judgment and available information. Management
has made significant estimates in certain areas, such as the fair values of financial
 
instruments, and the allowance for credit losses
(“ACL”). Because of the inherent uncertainties associated with any estimation
 
process and future changes in market and economic
conditions, it is possible that actual results could differ significantly from those estimates.
 
The Company's significant accounting policies followed in the preparation of
 
the unaudited consolidated financial statements are
disclosed in Note 1 of the audited financial statements and notes for the year ended
 
December 31, 2022 and are contained in the
Company's Annual Report on Form 10-K for that period. There have been no significant changes to the application of
 
significant
accounting policies since December 31, 2022 other than those noted below
:
Related Party Transactions
The Bank extends credit and receives deposits from related parties. In management’s
 
opinion, the loans and deposits were made
in the ordinary course of business and made on similar terms as those prevailing
 
at the time with other persons. Related party loans
totaled $
11
 
million and $
13
 
million at March 31, 2023 and December 31, 2022, respectively. Related party deposits
 
totaled $
129
 
million
and $
92
 
million at March 31, 2023 and December 31, 2022, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10
Accounting Pronouncements Implemented
ASU 2022-02, Financial Instruments-Credit Losses (Topic 326):
 
Troubled Debt Restructurings and Vintage Disclosures
Background
– ASU 2022-02 provides new guidance on (i) troubled debt restructurings (“TDRs”) and (ii) vintage disclosures
 
for
gross write-offs. The update eliminates the accounting guidance for TDRs and requires a company to determine
 
if a modification
results in a new loan or a continuation of an existing loan. The update enhances the required
 
disclosures for certain modifications
made to borrowers experiencing financial difficulty. In addition, the update
 
requires disclosure of current-period gross charge-offs
by year of origination for financing receivables. For the Company, the
 
amendments are effective as of January 1, 2023.
Impact of adoption
 
– The Company adopted the provisions of this guidance as of January 1, 2023 on a prospective
 
basis. The
adoption of this ASU did not impact our consolidated financial statements.
 
The incremental vintage disclosures for gross write-
offs are included within “Note 3: Loans and Allowance for Credit Losses.”
 
Note 2: Securities
The amortized cost and approximate fair values, together with gross unrealized
 
gains and losses, of period end available-for-sale
securities consisted of the following:
 
March 31, 2023
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
274,895
$
2,110
$
22,356
$
254,649
Collateralized mortgage obligations - GSE residential
10,989
-
604
10,385
State and political subdivisions
523,464
1,449
47,771
477,142
Corporate bonds
9,754
-
679
9,075
Total available-for-sale securities
$
819,102
$
3,559
$
71,410
$
751,251
December 31, 2022
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair Value
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
$
197,243
$
232
$
25,166
$
172,309
Collateralized mortgage obligations - GSE residential
11,629
-
743
10,886
State and political subdivisions
551,007
929
57,440
494,496
Corporate bonds
9,762
-
552
9,210
Total available-for-sale securities
$
769,641
$
1,161
$
83,901
$
686,901
The carrying value of securities pledged as collateral was $
17
 
million and $
22
 
million at March 31, 2023 and December 31, 2022,
respectively.
As of March 31, 2023 and December 31, 2022, the available-for-sale securities
 
had $
6
 
million of accrued interest, excluded from
the amortized cost basis, and presented in “interest receivable” on the
 
consolidated statements of financial condition.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
11
The following tables summarize the gross realized gains and losses from sales or
 
maturities of AFS securities:
 
For the Three Months Ended
March 31, 2023
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Gain
(Dollars in thousands)
Available-for-sale securities
$
193
$
(130)
$
63
For the Three Months Ended
March 31, 2022
Gross
Realized
Gains
Gross
Realized
Losses
Net
Realized
Loss
(Dollars in thousands)
Available-for-sale securities
$
1
$
(27)
$
(26)
The following table shows available-for-sale securities gross unrealized losses, the
 
number of securities that are in an unrealized
loss position, and fair value of the Company’s investments with unrealized
 
losses, aggregated by investment class and length of time that
individual securities have been in a continuous unrealized loss position at
 
March 31, 2023 and December 31, 2022:
 
March 31, 2023
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
(Dollars in thousands)
Available-for-sale
securities
Mortgage-backed -
GSE residential
$
13,935
$
562
20
$
133,560
$
21,794
36
$
147,495
$
22,356
56
Collateralized
mortgage obligations
- GSE residential
2,235
88
1
8,150
516
18
10,385
604
19
State and political
subdivisions
142,418
2,633
105
210,220
45,138
151
352,638
47,771
256
Corporate bonds
4,861
251
2
4,213
428
3
9,074
679
5
Total temporarily
impaired securities
$
163,449
$
3,534
128
$
356,143
$
67,876
208
$
519,592
$
71,410
336
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
12
December 31, 2022
Less than 12 Months
12 Months or More
Total
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
Fair Value
Unrealized
Losses
Number of
Securities
(Dollars in thousands)
Available-for-sale
securities
Mortgage-backed -
GSE residential
$
91,929
$
10,410
41
$
66,036
$
14,756
16
$
157,965
$
25,166
57
Collateralized
mortgage obligations
- GSE residential
10,636
733
18
251
10
1
10,887
743
19
State and political
subdivisions
350,884
36,697
266
52,519
20,743
40
403,403
57,440
306
Corporate bonds
9,210
552
5
-
-
-
9,210
552
5
Total temporarily
impaired securities
$
462,659
$
48,392
330
$
118,806
$
35,509
57
$
581,465
$
83,901
387
Based on the Company’s evaluation at each respective period end,
 
we recorded
no
 
credit loss impairment during the first quarter
of 2023 or fourth quarter of 2022.
 
The unrealized losses in the Company’s investment portfolio were caused by
 
interest rate changes.
 
As of March 31, 2023 the Company does not intend to sell the investments in loss positions, and
 
it is not more likely than not the
Company will be required to sell the investments before recovery of their amortized
 
cost basis.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13
The amortized cost, fair value, and weighted average yield of available-for-sale
 
securities at March 31, 2023, by contractual
maturity, are shown below:
 
March 31, 2023
Within
After One to
After Five to
After
One Year
Five Years
Ten Years
Ten Years
Total
(Dollars in thousands)
Available-for-sale securities
Mortgage-backed - GSE residential
(1)
Amortized cost
$
-
$
17
$
91
$
274,787
$
274,895
Estimated fair value
$
-
$
17
$
88
$
254,544
$
254,649
Weighted average yield
(2)
-
%
4.82
%
4.02
%
3.14
%
3.14
%
Collateralized mortgage obligations -
GSE residential
(1)
Amortized cost
$
-
$
-
$
2,322
$
8,667
$
10,989
Estimated fair value
$
-
$
-
$
2,235
$
8,150
$
10,385
Weighted average yield
(2)
-
%
-
%
2.75
%
2.25
%
2.36
%
State and political subdivisions
Amortized cost
$
1,075
$
7,962
$
90,970
$
423,457
$
523,464
Estimated fair value
$
1,078
$
8,158
$
90,981
$
376,925
$
477,142
Weighted average yield
(2)
3.71
%
4.32
%
2.96
%
2.68
%
2.76
%
Corporate bonds
Amortized cost
$
-
$
149
$
9,605
$
-
$
9,754
Estimated fair value
$
-
$
146
$
8,929
$
-
$
9,075
Weighted average yield
(2)
-
%
4.09
%
5.71
%
-
%
5.68
%
Total available-for-sale securities
Amortized cost
$
1,075
$
8,128
$
102,988
$
706,911
$
819,102
Estimated fair value
$
1,078
$
8,321
$
102,233
$
639,619
$
751,251
Weighted average yield
(2)
3.71
%
4.32
%
3.21
%
2.85
%
2.92
%
(1)
Actual maturities may differ from contractual maturities because issuers may have
 
the rights to call or prepay obligations with or
without prepayment penalties.
(2)
Yields are calculated based on amortized cost using 30/360 day basis.
 
Tax-exempt securities are not tax effected.
Equity Securities
Equity securities consist of $
3.2
 
million of private equity investments. Equity securities are included in “other assets” on
 
the
consolidated statements of financial condition.
The Company elected a measurement alternative for three private equity
 
investments that did not have a readily determinable fair
value and did not qualify for the practical expedient to estimate fair value using the
 
net asset value per share.
 
A cost basis was
calculated for the equity investments.
 
The recorded balance will adjust for any impairment or any observable
 
price changes for an
identical or similar investment of the same issuer. No such events occurred
 
during the three-month period ended March 31, 2023.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
14
The following is a summary of the unrealized and realized gains and losses on equity
 
securities recognized in net income:
 
Three Months Ended
March 31,
 
2023
2022
(Dollars in thousands)
Net gains (losses) recognized during the reporting period on equity
 
securities
$
10
$
(103)
Less: net gains recognized during the reporting period on equity securities sold
 
during the reporting period
-
-
Unrealized gains (losses) recognized during the reporting period on equity securities
 
still held at the reporting
date
$
10
$
(103)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15
Note 3:
 
Loans and Allowance for Credit Losses
The table below shows the loan portfolio composition including carrying value
 
by segment as of the dates shown. The carrying value of loans is net of discounts, fees, costs,
and fair value marks of $
24
 
million as of March 31, 2023 and December 31, 2022.
March 31, 2023
December 31, 2022
Amount
% of Loans
Amount
% of Loans
(Dollars in thousands)
Commercial and industrial
$
986,636
17
%
$
1,017,678
19
%
Commercial and industrial lines of credit
1,047,280
19
957,254
18
Energy
193,859
3
173,218
3
Commercial real estate
1,808,888
33
1,718,947
32
Construction and land development
845,085
15
794,788
15
Residential real estate
412,334
7
409,124
8
Multifamily real estate
295,469
5
237,984
4
Consumer
58,088
1
63,736
1
Loans, net of unearned
 
fees
5,647,639
100
%
5,372,729
100
%
Less: allowance for credit losses on loans
65,130
61,775
Loans, net of the allowance for credit losses on loans
$
5,582,509
$
5,310,954
 
Accrued interest of $
24
 
million and $
23
 
million at March 31, 2023 and December 31, 2022, respectively,
 
presented in “interest receivable” on the consolidated statements of
financial condition is excluded from the carrying value disclosed in
 
the above table.
 
The Company aggregates the loan portfolio by similar credit risk characteristics. The loan
 
segments are described in additional detail below:
●
Commercial and Industrial
 
- The category includes loans to commercial and industrial customers for use in property,
 
plant, and equipment purchases and
expansions. Loan terms typically require principal and interest payments
 
that decrease the outstanding loan balance.
 
Repayment is primarily from the cash flow of a
borrower’s principal business operation. Credit risk is driven by creditworthiness
 
of a borrower and the economic conditions that impact the cash flow stability from
business operations.
The category also includes the remaining PPP loans outstanding. These loans were established by the Coronavirus Aid, Relief, and Economic
 
Security Act which
authorized forgivable loans to small businesses to pay their employees during
 
the COVID-19 pandemic. The loans are
100
 
percent guaranteed by the Small Business
Administration (“SBA”) and repayment is primarily dependent on
 
the borrower’s cash flow or SBA repayment approval.
●
Commercial and Industrial Lines of Credit
– The category includes
 
lines of credit to commercial and industrial customers for working capital needs. The loan
terms typically require interest-only payments, mature in one year, and
 
require the full balance paid-off at maturity. Lines of credit allow the borrower
 
to draw down
and repay the line of credit based on the customer’s cash flow needs. Repayment
 
is primarily from the operating cash flow of the business. Credit risk is driven by
creditworthiness of a borrower and the economic conditions that impact the cash
 
flow stability from business operations.
 
 
16
●
Energy
 
- The category includes loans to oil and natural gas customers for use in financing working
 
capital needs, exploration and production activities, and
acquisitions. The loans are repaid primarily from the conversion of crude oil and natural gas to cash. Credit
 
risk is driven by creditworthiness of a borrower and the
economic conditions that impact the cash flow stability from business operations.
 
Energy loans are typically collateralized with the underlying oil and gas reserves.
●
Commercial Real Estate
 
- The category includes loans that typically involve larger principal amounts and repayment of these
 
loans is generally dependent on the
successful operations of the property securing the loan or the business conducted
 
on the property securing the loan. These are viewed primarily as cash flow loans and
secondarily as loans secured by real estate. Credit risk may be impacted by the
 
creditworthiness of a borrower, property values and the local economies in the
borrower’s market areas.
●
Construction and Land Development
 
- The category includes loans that are usually based upon estimates of costs and estimated value
 
of the completed project and
include independent appraisal reviews and a financial analysis of the developers
 
and property owners. Sources of repayment include permanent loans,
 
sales of
developed property or an interim loan commitment from the Company
 
until permanent financing is obtained. These loans are higher risk than other real estate loans
due to their ultimate repayment being sensitive to interest rate changes, general
 
economic conditions, and the availability of long-term financing. Credit risk may
 
be
impacted by the creditworthiness of a borrower, property values and
 
the local economies in the borrower’s market areas.
●
Residential Real Estate
- The category includes loans that are generally secured by owner-occupied
 
1-4 family residences. Repayment of these loans is primarily
dependent on the personal income and credit rating of the borrowers. Credit
 
risk in these loans can be impacted by economic conditions within or outside the
borrower’s market areas that might impact either property values or a borrower’s
 
personal income.
 
●
Multifamily Real Estate -
The category includes loans that are generally secured by multifamily properties.
 
Repayment of these loans is primarily dependent on
occupancy rates and the personal income of the tenants. Credit risk in these
 
loans can be impacted by economic conditions within or outside the
 
borrower’s market
areas that might impact either property values or the tenants’ personal income.
 
●
Consumer
- The category includes revolving lines of credit and various term loans such as automobile
 
loans and loans for other personal purposes. Repayment is
primarily dependent on the personal income and credit rating of the borrowers.
 
Credit risk is driven by consumer economic factors (such as unemployment and
general economic conditions in the borrower’s market area) and the
 
creditworthiness of a borrower.
Allowance for Credit Losses
The Company’s CECL committee meets at least quarterly to oversee the ACL methodology. The committee estimates the ACL using relevant available information, from
internal and external sources, relating to past events, current conditions,
 
and reasonable and supportable forecasts. The ACL represents the Company’s current estimate of lifetime
credit losses inherent in the loan portfolio at the statement of financial condition
 
date. The ACL is
 
adjusted for expected prepayments when appropriate and excludes expected
extensions, renewals, and modifications.
 
The ACL is the sum of three components: (i) asset specific / individual loan reserves; (ii) quantitative (formulaic or pooled) reserves; and (iii)
 
qualitative (judgmental)
reserves.
 
Asset Specific -
 
When unique qualities cause a loan’s exposure to loss to be inconsistent with the
 
pool segments, the loan is individually evaluated. Individual reserves are
calculated for loans that are risk-rated substandard and on non-accrual
 
and loans that are risk-rated doubtful or loss that are greater than a defined dollar threshold.
 
In addition, TDRs
are also individually evaluated. Reserves on asset specific loans may be based
 
on collateral, for collateral-dependent loans, or on quantitative and
 
qualitative factors, including
expected cash flow, market sentiment, and guarantor support.
 
 
 
17
Quantitative
- The Company used the cohort method, which identifies and captures the balance of a pool of loans with similar
 
risk characteristics as of a particular time to
form a cohort. For example, the outstanding commercial and industrial
 
loans and commercial and industrial lines of credit loan segments as of quarter
 
-end are considered cohorts.
The cohort is then tracked for losses over the remaining life of loans or until the poo
 
l
 
is exhausted. The Company used a lookback period of approximately six-years to establish the
cohort population. By using the historical data timeframe, the Company can establish
 
a historical loss factor for each of its loan segments and adjust the losses with qualitative and
forecast factors.
Qualitative
 
– The Company uses qualitative factors to adjust the historical loss factors for current conditions. The
 
Company primarily uses the following qualitative factors:
◾
The nature and volume of changes in risk ratings;
◾
The volume and severity of past due loans;
◾
The volume of non-accrual loans;
◾
The nature and volume of the loan portfolio, including the existence, growth, and
 
effect of any concentrations of credit;
◾
Changes in the Institute of Supply Management’s Purchasing Manager Indices
 
(“PMI”) for services and manufacturing;
◾
Changes in collateral values;
 
◾
Changes in lending policies, procedures, and quality of loan reviews;
◾
Changes in lending staff; and
◾
Changes in competition, legal and regulatory environments
In addition to the current condition qualitative adjustments, the Company uses the
 
Federal Reserve’s unemployment forecast to adjust the ACL based on forward looking
guidance. The Federal Reserve’s unemployment forecast extends three-years
 
and is eventually reverted to the mean of six percent by year 10.
 
Internal Credit Risk Ratings
The Company uses a weighted average risk rating factor to adjust the historical
 
loss factors for current events. Risk ratings incorporate the criteria utilized by regulatory
authorities to describe criticized assets, but separate various levels of risk
 
concentrated within the regulatory “Pass” category. Risk ratings are established
 
for loans at origination and
are monitored on an ongoing basis. The rating assigned to a loan reflects the risks
 
posed by the borrower’s expected performance and the transaction’s structure.
 
Performance metrics
used to determine a risk rating include, but are not limited to, cash flow adequacy,
 
liquidity, and collateral. A description of the loan risk ratings follows:
Loan Grades
●
Pass (risk rating 1-4)
 
- 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
 
18
deficiencies are not corrected. Loss potential, while existing in the aggregate
 
amount of substandard assets, does not have to exist in individual assets classified
substandard. Substandard loans include both performing and non-performing loans
 
and are broken out in the table below.
●
Doubtful (risk rating 7)
- The category includes borrowers that exhibit weaknesses inherent in a substandard credit and
 
characteristics that these weaknesses make
collection or liquidation in full highly questionable or improbable based
 
on existing facts, conditions, and values. Because of reasonably specific
 
pending factors,
which may work to the advantage and strengthening of the assets, classification as a loss is
 
deferred until its more exact status may be determined.
●
Loss (risk rating 8)
- Credits which are considered uncollectible or of such little value that their continuance
 
as a bankable asset is not warranted.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
19
The following tables present the credit risk profile of the Company’s loan portfolio
 
based on internal rating categories and loan segments as of March 31, 2023
 
and December
31, 2022:
 
As of March 31, 2023
Amortized Cost Basis by Origination Year and Internal Risk Rating
Amortized Cost Basis
2023
2022
2021
2020
2019
2018 and
Prior
Revolving
Loans
Revolving
Loans
converted to
Term Loans
Total
(Dollars in thousands)
Commercial and industrial
Pass
$
111,407
$
379,176
$
224,316
$
54,865
$
48,014
$
64,730
$
-
$
27,044
$
909,552
Special mention
12,388
5,826
19,996
13,802
795
318
-
33
53,158
Substandard - accrual
-
69
125
1,566
1,152
1,019
-
19,786
23,717
Substandard - non-
accrual
-
-
-
-
-
11
-
198
209
Doubtful
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
Total
$
123,795
$
385,071
$
244,437
$
70,233
$
49,961
$
66,078
$
-
$
47,061
$
986,636
Commercial and industrial
 
lines of credit
Pass
$
-
$
-
$
-
$
-
$
-
$
-
$
973,052
$
-
$
973,052
Special mention
-
-
-
-
-
-
49,569
-
49,569
Substandard - accrual
-
-
-
-
-
-
18,594