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CROSSFIRST BANKSHARES, INC. - Quarter Report: 2019 September (Form 10-Q)


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 September 30, 2019

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) 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:
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



APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 11, 2019, the registrant had 51,969,203 shares of common stock, par value $0.01, outstanding.




CrossFirst Bankshares, Inc.
Form 10-Q
Quarter Ended September 30, 2019

Index
Part I. Financial Information
 
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements - Unaudited
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                                                                                            
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
Part II. Other Information
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
Signatures
 
 
 
 
 
 
 
 
 



Table of Contents

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: 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 prospectus (File No. 333-232704), dated August 14, 2019, filed with the Securities and Exchange Commission (‘‘SEC’’) pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the ‘‘Securities Act’’), on August 15, 2019, related to our initial public offering.

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.



 
 
4

Table of Contents

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CROSSFIRST BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
 
September 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
 
(Dollars in thousands)
Assets
 
 
 
Cash and cash equivalents
$
128,126

 
$
216,541

Available for sale securities - taxable
323,531

 
296,133

Available for sale securities - tax-exempt
409,562

 
367,545

Premises and equipment, held for sale

 
3,444

 Loans, net of allowance for loan losses of $42,995 and $37,826 at September 30, 2019 and December 31, 2018, respectively
3,586,797


3,022,921

Premises and equipment, net
71,314

 
74,945

Restricted equity securities
16,053

 
14,525

Interest receivable
15,909

 
14,092

Foreclosed assets held for sale
2,471

 

Deferred tax asset
7,429

 
16,316

Goodwill and other intangible assets, net
7,720

 
7,796

Bank-owned life insurance
65,228

 
63,811

Other
17,173

 
9,146

Total assets
$
4,651,313


$
4,107,215

Liabilities and stockholders’ equity
 
 
 
Deposits
 
 
 
Non-interest bearing
$
513,832

 
$
484,284

Savings, NOW and money market
1,922,522

 
1,714,136

Time
1,221,754

 
1,009,677

Total deposits
3,658,108


3,208,097

Federal funds purchased and repurchase agreements
49,810

 
75,406

Federal Home Loan Bank advances
307,804

 
312,985

Other borrowings
912

 
884

Interest payable and other liabilities
32,244

 
19,507

Total liabilities
4,048,878

 
3,616,879

Stockholders’ equity
 
 
 
Redeemable preferred stock, $0.01 par value, $25 liquidation value:
 
 
 
authorized - 5,000,000 shares, issued - 0 and 1,200,000 shares at September 30, 2019 and December 31, 2018, respectively

 
12

Common stock, $0.01 par value:
 
 
 
authorized - 200,000,000 shares, issued - 51,969,203 and 45,074,322 shares at September 30, 2019 and December 31, 2018, respectively
520

 
451

Additional paid-in capital
518,816

 
454,512

Retained earnings
65,282

 
38,567

Other
(84
)
 
(196
)
Accumulated other comprehensive income (loss)
17,901

 
(3,010
)
Total stockholders’ equity
602,435


490,336

Total liabilities and stockholders’ equity
$
4,651,313

 
$
4,107,215


See Notes to Consolidated Financial Statements (unaudited)

5

Table of Contents

CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands except per share data)
Interest Income
 
 
 
 
 
 
 
Loans, including fees
$
49,327

 
$
34,012

 
$
142,319

 
$
89,262

Available for sale securities - Taxable
1,991

 
2,200

 
6,646

 
5,729

Available for sale securities - Tax-exempt
2,969

 
3,586

 
8,820

 
11,622

Deposits with financial institutions
970

 
723

 
2,452

 
2,481

Dividends on bank stocks
272

 
254

 
801

 
718

Total interest income
55,529

 
40,775

 
161,038

 
109,812

Interest Expense
 
 
 
 

 
 
Deposits
18,003

 
9,999

 
51,421

 
26,639

Fed funds purchased and repurchase agreements
74

 
287

 
501

 
628

Advances from Federal Home Loan Bank
1,629

 
1,468

 
4,739

 
4,308

Other borrowings
37

 
53

 
112

 
184

Total interest expense
19,743

 
11,807

 
56,773

 
31,759

Net Interest Income
35,786

 
28,968

 
104,265

 
78,053

Provision for Loan Losses
4,850

 
3,000

 
10,550

 
9,000

Net Interest Income after Provision for Loan Losses
30,936

 
25,968

 
93,715

 
69,053

Non-Interest Income
 
 

 

 

Service charges and fees (rebates) on customer accounts
72

 
(100
)
 
441

 
506

Gain on sale of available for sale securities
34


195

 
467


608

Impairment of premises and equipment held for sale


(171
)
 
(424
)

(171
)
Gain on sale of loans
49


25

 
207


618

Income from bank-owned life insurance
476

 
513

 
1,416

 
1,511

Swap fee income, net
1,879


253

 
2,415


299

ATM and credit card interchange income
476


301

 
1,312


827

Other non-interest income
226


169

 
695


690

Total non-interest income
3,212


1,185

 
6,529


4,888

Non-Interest Expense
 
 
 
 

 

Salaries and employee benefits
14,256

 
12,652

 
43,296

 
43,689

Occupancy
2,080

 
2,132

 
6,301

 
6,199

Professional fees
427

 
766

 
1,923

 
2,421

Deposit insurance premiums
302

 
823

 
2,020

 
2,411

Data processing
649

 
528

 
1,868

 
1,470

Advertising
580

 
527

 
1,770


1,982

Software and communication
900


630

 
2,407


1,958

Depreciation and amortization
413


516

 
1,320


1,306

Other non-interest expense
1,565


1,301

 
4,858


4,153

Total non-interest expense
21,172


19,875

 
65,763


65,589

Net Income Before Taxes
12,976

 
7,278

 
34,481

 
8,352

Income tax expense (benefit)
2,592

 
924

 
5,308

 
(904
)
Net Income
$
10,384

 
$
6,354

 
$
29,173

 
$
9,256

Basic Earnings Per Share(1)
$
0.22

 
$
0.15

 
$
0.63

 
$
0.23

Diluted Earnings Per Share(1)
$
0.21

 
$
0.15

 
$
0.61

 
$
0.22

(1) Share data has been adjusted to reflect a 2-for-1 stock split effected in the form of a dividend on December 21, 2018.

See Notes to Consolidated Financial Statements (unaudited)

6

Table of Contents

CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS) - UNAUDITED
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Net Income
$
10,384

 
$
6,354

 
$
29,173

 
$
9,256

Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities
5,757

 
(6,592
)
 
28,084

 
(22,062
)
Less: income tax (benefit)
1,410

 
(1,620
)
 
6,890

 
(5,414
)
Unrealized gain (loss) on available-for-sale securities, net of income tax (benefit)
4,347

 
(4,972
)
 
21,194

 
(16,648
)
Reclassification adjustment for realized gains included in income
34

 
195

 
467

 
608

Less: income tax
9

 
47

 
115

 
149

Less: reclassification adjustment for realized gains included in income, net of income tax
25

 
148

 
352

 
459

Other comprehensive income (loss)
4,322

 
(5,120
)
 
20,842

 
(17,107
)
Comprehensive Income (Loss)
$
14,706

 
$
1,234

 
$
50,015

 
$
(7,851
)

See Notes to Consolidated Financial Statements (unaudited)

7

Table of Contents

CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
Preferred Stock
 
Common Stock
 
Paid in
 
Retained
 
 
 
Comprehensive
 
 
 
Shares
 
Amount
 
Shares(1)
 
Amount(1)
 
Capital
 
Earnings(1)
 
Other
 
Income (Loss)
 
Total
 
(Dollars in thousands)
Balance at June 30, 2018
1,200,000

 
$
12

 
35,496,278

 
$
355

 
$
321,544

 
$
25,778

 
$
(191
)
 
$
(4,961
)
 
$
342,537

Net income

 

 

 

 

 
6,354

 

 

 
6,354

Change in unrealized depreciation on available-for-sale securities

 

 

 

 

 

 

 
(5,120
)
 
(5,120
)
Issuance of shares

 

 
5,031,110

 
50

 
69,733

 
(25
)
 

 

 
69,758

Issuance of shares from equity-based awards

 

 

 

 

 

 

 

 

Retired shares

 

 
(265,908
)
 
(3
)
 
(2,534
)
 
(1,253
)
 

 

 
(3,790
)
Preferred dividends declared

 

 

 

 

 
(525
)
 

 

 
(525
)
Employee receivables from sale of stock

 

 

 

 
2

 

 
(1
)
 

 
1

Share-based compensation

 

 

 

 
527

 

 

 

 
527

Employee stock purchase plan additions

 

 

 

 
38

 

 

 

 
38

Balance at September 30, 2018
1,200,000

 
$
12

 
40,261,480

 
$
402

 
$
389,310

 
$
30,329

 
$
(192
)
 
$
(10,081
)
 
$
409,780


Balance at June 30, 2019

 
$

 
45,367,641

 
$
453

 
$
430,347

 
$
54,899

 
$
(83
)
 
$
13,579

 
$
499,195

Net income

 

 

 

 

 
10,384

 

 

 
10,384

Change in unrealized appreciation on available-for-sale securities

 

 

 

 

 

 

 
4,322

 
4,322

Issuance of shares

 

 
6,600,245

 
67

 
87,154

 
(1
)
 

 

 
87,220

Issuance of shares from equity-based awards

 

 
1,317

 

 
(10
)
 

 

 

 
(10
)
Employee receivables from sale of stock

 

 

 

 
1

 

 
(1
)
 

 

Share-based compensation

 

 

 

 
1,324

 

 

 

 
1,324

Employee stock purchase plan additions

 

 

 

 

 

 

 

 

Balance at September 30, 2019

 
$

 
51,969,203

 
$
520

 
$
518,816

 
$
65,282

 
$
(84
)
 
$
17,901

 
$
602,435

(1) Share data has been adjusted to reflect a 2-for-1 stock split effected in the form of a dividend on December 21, 2018.





See Notes to Consolidated Financial Statements (unaudited)

8

Table of Contents

CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED - CONTINUED
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
Other
 
 
 
Preferred Stock
 
Common Stock
 
Paid in
 
Retained
 
 
 
Comprehensive
 
 
 
Shares
 
Amount
 
Shares(1)
 
Amount(1)
 
Capital
 
Earnings(1)
 
Other
 
Income (Loss)
 
Total
 
(Dollars in thousands)
Balance at December 31, 2017
1,200,000

 
$
12

 
30,686,256

 
$
307

 
$
256,108

 
$
23,950

 
$
(256
)
 
$
7,026

 
$
287,147

Net income

 

 

 

 

 
9,256

 

 

 
9,256

Change in unrealized depreciation on available-for-sale securities

 

 

 

 

 

 

 
(17,107
)
 
(17,107
)
Issuance of shares

 

 
9,557,054

 
95

 
132,868

 
(48
)
 

 

 
132,915

Issuance of shares from equity-based awards

 

 
284,078

 
3

 
(1,653
)
 
(1
)
 

 

 
(1,651
)
Retired shares

 

 
(265,908
)
 
(3
)
 
(2,534
)
 
(1,253
)
 

 

 
(3,790
)
Preferred dividends declared

 

 

 

 

 
(1,575
)
 

 

 
(1,575
)
Employee receivables from sale of stock

 

 

 

 
8

 

 
64

 

 
72

Share-based compensation

 

 

 

 
4,386

 

 

 

 
4,386

Employee stock purchase plan additions

 

 

 

 
127

 

 

 

 
127

Balance at September 30, 2018
1,200,000

 
$
12

 
40,261,480

 
$
402

 
$
389,310

 
$
30,329

 
$
(192
)
 
$
(10,081
)
 
$
409,780

Balance at December 31, 2018
1,200,000

 
$
12

 
45,074,322

 
$
451

 
$
454,512

 
$
38,567

 
$
(196
)
 
$
(3,010
)
 
$
490,336

Net income
 
 

 

 

 

 
29,173

 

 

 
29,173

Change in unrealized appreciation on available-for-sale securities

 

 

 

 


 

 

 
20,842

 
20,842

Issuance of shares

 

 
6,851,213

 
68

 
88,869

 

 

 

 
88,937

Issuance of shares from equity-based awards

 

 
53,668

 
1

 
(246
)
 

 

 

 
(245
)
Retired shares
(1,200,000
)
 
(12
)
 
(10,000
)
 

 
(30,088
)
 
(55
)
 

 


 
(30,155
)
Preferred dividends declared

 

 

 

 

 
(175
)
 

 

 
(175
)
Employee receivables from sale of stock

 

 

 

 
5

 

 
112

 

 
117

Share-based compensation

 

 

 

 
3,569

 

 

 

 
3,569

Employee receivables from sale of stock

 

 

 

 
36

 

 

 

 
36

Adoption of ASU 2016-01

 

 

 

 

 
(69
)
 

 
69

 

Adoption of ASU 2018-07

 

 

 

 
2,159

 
(2,159
)
 

 

 

Balance at September 30, 2019

 
$

 
51,969,203

 
$
520

 
$
518,816

 
$
65,282

 
$
(84
)
 
$
17,901

 
$
602,435

(1) Share data has been adjusted to reflect a 2-for-1 stock split effected in the form of a dividend on December 21, 2018.


See Notes to Consolidated Financial Statements (unaudited)

9

Table of Contents

CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED



 
Nine months ended
 
September 30,
 
2019
 
2018
 
(Dollars in thousands)
Operating Activities
 
 
 
Net income
$
29,173

 
$
9,256

Items not requiring (providing) cash
 
 
 
Depreciation and amortization
4,015

 
3,299

Provision for loan losses
10,550

 
9,000

Accretion of discounts and amortization of premiums on securities
4,098

 
4,134

Equity based compensation
3,606

 
4,513

(Gain) loss on disposal of fixed assets
64

 
(4
)
Gain on sale of loans
(207
)
 
(618
)
Deferred income taxes
2,088

 
(1,105
)
Net increase in bank owned life insurance
(1,416
)
 
(1,511
)
Net realized gains on available-for-sale securities
(539
)
 
(608
)
Impairment of assets held for sale
424

 
171

Dividends on FHLB stock
(797
)
 
(713
)
Stock dividends on CRA mutual fund
(38
)
 
(34
)
Changes in
 
 
 
Interest receivable
(1,817
)
 
(2,105
)
Other assets
(7,795
)
 
(170
)
Other liabilities
13,261

 
4,237

Net cash provided by operating activities
54,670

 
27,742

Investing Activities
 
 
 
Net change in loans
(576,897
)
 
(741,784
)
Purchases of available-for-sale securities
(157,492
)
 
(198,214
)
Proceeds from maturities of available-for-sale securities
48,658

 
35,755

Proceeds from sale of available-for-sale securities
63,515

 
149,271

Purchase of premises and equipment
(649
)
 
(41,268
)
Purchase of restricted equity securities
(1,673
)
 
(1,300
)
Proceeds from the sale of fixed assets
3,324

 
1,862

Proceeds from sale of restricted equity securities
941

 
942

Net cash used in investing activities
(620,273
)
 
(794,736
)
Financing Activities
 
 
 
Net increase in demand deposits, savings, NOW and money market accounts
237,934

 
456,487

Net increase in time deposits
212,077

 
46,729

Net increase (decrease) in repurchase agreements and fed funds purchased
(50,596
)
 
77,479

Net increase in federal funds sold
25,000

 
55,000

Proceeds from line of credit

 
30,000

Repayment of line of credit

 
(30,000
)
Proceeds from Federal Home Loan Bank advances
45,000

 
28,000

Repayment of Federal Home Loan Bank advances
(50,181
)
 
(10,171
)
Net repayments of Federal Home Loan Bank line of credit

 
(25,000
)

See Notes to Consolidated Financial Statements (unaudited)

10

Table of Contents

CROSSFIRST BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED



 
Nine months ended
 
September 30,
 
2019
 
2018
 
(Dollars in thousands)
Retirement of preferred stock
$
(30,000
)
 
$

Issuance of common shares, net of issuance cost
88,390

 
132,550

Proceeds from employee stock purchase plan
547

 
367

Common stock purchased and retired
(155
)
 
(3,790
)
Acquisition of common stock for tax withholding obligations
(245
)
 
(1,651
)
Net decrease in employee receivables
117

 
72

Dividends paid on preferred stock
(700
)
 
(1,575
)
Net cash provided by financing activities
477,188

 
754,497

Decrease in Cash and Cash Equivalents
(88,415
)
 
(12,497
)
Cash and Cash Equivalents, Beginning of Period
216,541

 
130,820

Cash and Cash Equivalents, End of Period
$
128,126

 
$
118,323

Supplemental Cash Flows Information
 
 
 
Interest paid
$
54,998

 
$
31,437

Income taxes paid
1,030

 
19

Foreclosed assets in settlement of loans
2,471

 

Dividends declared and unpaid on preferred stock

 
525



See Notes to Consolidated Financial Statements (unaudited)

11

Notes to Unaudited Consolidated Financial Statements
 

Note 1:
Nature of Operations and Summary of Significant Accounting Policies
Organization and Nature of Operations
CrossFirst Bankshares, Inc. (the ‘‘Company’’), a Kansas corporation, was incorporated in December 2017. Prior to incorporation, the Company was registered as a limited liability company under the name CrossFirst Holdings, LLC. The Company is a bank holding company whose principal activities are the ownership and management of its wholly-owned subsidiaries, CrossFirst Bank (the ‘‘Bank’’) and CFSA, LLC (“CFSA”), which holds title to certain assets. In addition, CrossFirst Investments, Inc. (‘‘CFI’’) is a wholly-owned subsidiary of the Bank, which holds investments in marketable securities.
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 and CFSA. 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 notes thereto, for the six-months ended June 30, 2019 and year ended December 31, 2018 included in the Company’s prospectus, dated August 14, 2019, filed with the Securities and Exchange Commission (‘‘SEC’’) pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on August 15, 2019, related to the Company’s initial public offering (the ‘‘IPO Prospectus’’).
In the opinion of management, the interim financial statements include all adjustments all of 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.
There have been no significant changes in the accounting policies of the Company since June 30, 2019, the most recent date financial statements were provided within the IPO Prospectus.  The information contained in the financial statements and footnotes for the period ended June 30, 2019 included in the Company’s IPO Prospectus should be referred to in connection with these unaudited interim consolidated financial statements.
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 has identified accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of the Company’s financial statements to those judgments and assumptions, are critical to an understanding of the Company’s financial condition and results of operations. Actual results could differ from those estimates. The Allowance for Loan and Lease Losses, Investment Securities Impairment, Deferred Tax Asset, and Fair Value of Financial Instruments are particularly susceptible to significant change.
Change in Presentation Due to Stock Split
On December 18, 2018, the Company announced a 2-for-1 stock split, effected in the form of a dividend, effective December 21, 2018. Share data and per share data were retroactively adjusted for the periods presented to reflect the change in capital structure.
Cash Equivalents
The Company had $85.0 million of cash and cash equivalents at the Federal Reserve Bank of Kansas City as of September 30, 2019. The reserve required at September 30, 2019 was approximately $63.3 million. In addition, the

 
 
12

Notes to Unaudited Consolidated Financial Statements
 

Company is at times required to place cash collateral with a third party as part of its back-to-back swap agreements. At September 30, 2019, approximately $18.2 million was required as cash collateral.
Initial Public Offering
On August 19, 2019, the Company completed its initial public offering of common shares. The Company issued and sold 5,750,000 common shares at a public offering price of $14.50 per share. After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $75.6 million from the initial public offering. In addition, certain selling stockholders participated in the offering and sold an aggregate of 1,261,589 common shares at a public offering price of $14.50 per share. The Company did not receive any proceeds from the sales of shares by the selling stockholders.
On September 17, 2019, the underwriters partially exercised their option to purchase additional shares. The Company issued and sold 844,362 common shares at a public offering price of $14.50 per share. After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $11.4 million.
As of September 30, 2019, the Company qualified as an emerging growth company (‘‘EGC’’) under the Jumpstart Our Business Startups Act of 2012 (the ‘‘JOBS Act’’). 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. Amongst 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 opt out of the extended transition period under the JOBS Act.
Recent Accounting Pronouncements
The Company has implemented the following Accounting Standards Updates (‘‘ASU’’) during 2019:
Standard
 
Date of Adoption
 
Description
 
Effect on Financial Statements or Other Significant Matters
ASU 2018-07 -

Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
 
January 2019

Early adoption
 
Expanded the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, excluding share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.

The amendments include (1) grants are measured at grant-date fair value of the equity instruments, (2) equity-classified nonemployee share-based payment awards are measured at the grant date,
(3) performance based awards are measured based on the probability of satisfying the performance conditions, and (4) in general, non-employee share-based payment awards will continue to be subject to the requirements of ASC 718 unless modified after the good has been delivered, the service has been rendered, any other conditions necessary to earn the right to benefit from the instrument have been satisfied, and the nonemployee is no longer providing goods or services.
 
The Company had 216,960 stock-based awards to non-employees as of the implementation date, including 116,960 performance-based restricted stock units. The adoption of the ASU allowed the Company to (i) set the fair market value of the non-employee awards as of the adoption date and (ii) start to expense the performance-based restricted stock units based on the probability of satisfying the performance conditions.

Adoption of ASU 2018-07 required the Company to make a one-time transfer of $2.2 million from retained earnings to additional paid in capital. The Company will record forfeitures as they occur and base fair market values on the expected term, like the Company’s accounting for employee-based awards.

 
 
13

Notes to Unaudited Consolidated Financial Statements
 

Standard
 
Date of Adoption
 
Description
 
Effect on Financial Statements or Other Significant Matters
ASU 2016-01 -

Financial Instruments-Overall (Subtopic 825-10)
 
January 2019
 
Required equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income.

Emphasized the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of practicability exceptions in determining the fair value of loans.
 
The Company transferred $68.7 thousand from accumulated other comprehensive loss to retained earnings in January 2019.

There was no impact to the income statement on the adoption date.


ASU 2014-09 -

Revenue from Contracts with Customers
 
January 2019
 
Amended guidance related to revenue from contracts with customers.

The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Replaced nearly all existing revenue recognition guidance, including industry-specific guidance, established a new control-based revenue recognition model, changed the basis for deciding when revenue is recognized over time or at a point in time, provided new and more detailed guidance on specific topics and expands and improves disclosures about revenue.

 
The accounting update did not materially impact the financial statements or recognition of revenues.

The update did not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, which comprises a significant portion of the Company’s revenue stream.

In addition, the Company’s non-interest income is generated by customer transactions or through the passage of time and as a result the pattern or timing of income recognition was not impacted.
The Company has updates to the following ASUs that have not yet been adopted. A complete list of recent, applicable accounting pronouncements was provided in the IPO Prospectus:
Standard
 
Anticipated Date of Adoption
 
Description
 
Effect on Financial Statements or Other Significant Matters
ASU 2016-13

Financial Instruments-Credit Losses
 
The Company expects to implement this standard in 2020; however, the Company is not required to implement this standard until January 2023 if it maintains its EGC status.
 
Requires an entity to utilize a new impairment model known as the current expected credit loss (’’CECL’’) 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 has established a committee of individuals from applicable departments to oversee the implementation process.

The Company implemented a third-party software solution and completed the software implementation phase of the transition. The software implementation phase included data capture and portfolio segmentation amongst other items.

The Company has completed an initial parallel run using 2019 data and expects to complete a second parallel run using third quarter data during the fourth quarter.

At this time, an estimate of the impact cannot be established as the Company continues to evaluate the inputs into the model. The fourth quarter parallel run may provide a better estimate of the impact to the Company’s financial statements, but the actual impact could be significantly affected by the composition, characteristics and quality of the underlying loan portfolio at the time of adoption.


 
 
14

Notes to Unaudited Consolidated Financial Statements
 

Standard
 
Anticipated Date of Adoption
 
Description
 
Effect on Financial Statements or Other Significant Matters
ASU 2016-02

Leases (Topic 842)
 
The Company expects to implement this standard in 2020; however, the Company is not required to implement this standard until January 2021 if it maintains its EGC status.
 
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 is electing to apply the update as of the beginning of the period of adoption and the Company will not restate comparative periods. The Company also 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 three branch locations. Based on these 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 lease portfolio as of the adoption date.

Note 2:
Earnings Per Share
The following table presents the computation of basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Earnings per Share
 
 
 
 
 
 
 
Net income
$
10,384

 
$
6,354

 
$
29,173

 
$
9,256

Less: preferred stock dividends

 
525

 
175

 
1,575

Net income available to common stockholders
$
10,384

 
$
5,829

 
$
28,998

 
$
7,681

Weighted average common shares(1)
48,351,553

 
37,790,614

 
46,239,021

 
33,918,540

Earnings per share
$
0.22

 
$
0.15

 
$
0.63

 
$
0.23

Dilutive Earnings Per Share
 
 
 
 
 
 
 
Net income available to common stockholders
$
10,384

 
$
5,829

 
$
28,998

 
$
7,681

Weighted average common shares(1)
48,351,553

 
37,790,614

 
46,239,021

 
33,918,540

Effect of dilutive shares(1)
812,996
 
988,010
 
842,706
 
1,133,888
Weighted average dilutive common shares(1)
49,164,549

 
38,778,624

 
47,081,727

 
35,052,428

Diluted earnings per share
$
0.21

 
$
0.15

 
$
0.61

 
$
0.22

 
 
 
 
 
 
 
 
SARs, RSUs, RSAs, PRSUs, PSSs not included because to do so would be antidilutive(1)
541,556

 
442,452

 
507,167

 
273,180

 
 
 
 
 
 
 
 
1 Share data has been adjusted to reflect a 2-for-1 stock split effected in the form of a dividend on December 21, 2018.


 
 
15

Notes to Unaudited Consolidated Financial Statements
 

Note 3:
Securities
Available-for-Sale Debt and Equity Securities
The amortized cost and approximate fair values, together with gross unrealized gains and losses, of period end available-for-sale debt and equity securities consisted of the following:
 
September 30, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Approximate Fair Value
 
(Dollars in thousands)
Available-for-sale debt securities
 
 
 
 
 
 
 
Mortgage-backed - GSE residential
$
158,897

 
$
2,009

 
$
192

 
$
160,714

Collateralized mortgage obligations - GSE residential
147,917

 
1,002

 
244

 
148,675

State and political subdivisions
398,963

 
21,051

 
5

 
420,009

Corporate bonds
1,444

 
92

 

 
1,536

Total available-for-sale debt securities
707,221

 
24,154

 
441

 
730,934

Equity securities
 
 
 
 
 
 
 
Mutual funds
2,179

 

 
20

 
2,159

Total equity securities
2,179

 

 
20

 
2,159

Total available-for-sale securities
$
709,400

 
$
24,154

 
$
461

 
$
733,093

 
December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Approximate Fair Value
 
(Dollars in thousands)
Available-for-sale debt securities
 
 
 
 
 
 
 
Mortgage-backed - GSE residential
$
131,215

 
$
162

 
$
2,090

 
$
129,287

Collateralized mortgage obligations - GSE residential
154,110

 
287

 
1,771

 
152,626

State and political subdivisions
378,595

 
3,908

 
4,445

 
378,058

Corporate bonds
1,613

 
70

 
26

 
1,657

Total available-for-sale debt securities
665,533

 
4,427

 
8,332

 
661,628

Equity securities
 
 
 
 
 
 
 
Mutual funds
2,141

 

 
91

 
2,050

Total equity securities
2,141

 

 
91

 
2,050

Total available-for-sale securities
$
667,674

 
$
4,427

 
$
8,423

 
$
663,678



The carrying value of securities pledged as collateral was $36.6 million and $108.6 million at September 30, 2019 and December 31, 2018, respectively.


 
 
16

Notes to Unaudited Consolidated Financial Statements
 

The amortized cost and fair value of available-for-sale debt securities at September 30, 2019, by contractual maturity, are shown below:
 
September 30, 2019
 
Within
 
After One to
 
After Five to
 
After
 
 
 
One Year
 
Five Years
 
Ten Years
 
Ten Years
 
Total
 
(Dollars in thousands)
Available-for-sale debt securities
 
 
 
 
 
 
 
 
 
Mortgage-backed - GSE residential(1)
 
 
 
 
 
 
 
 
 
Amortized cost
$

 
$

 
$
1,411

 
$
157,486

 
$
158,897

Estimated fair value

 

 
1,471

 
159,243

 
160,714

Collateralized mortgage obligations - GSE residential(1)
 
 
 
 
 
 
 
 
 
Amortized cost

 

 
2,876

 
145,041

 
147,917

Estimated fair value

 

 
3,011

 
145,664

 
148,675

State and political subdivisions
 
 
 
 
 
 
 
 
 
Amortized cost

 
3,580

 
40,410

 
354,973

 
398,963

Estimated fair value

 
3,674

 
43,071

 
373,264

 
420,009

Corporate bonds
 
 
 
 
 
 
 
 
 
Amortized cost

 

 
1,444

 

 
1,444

Estimated fair value

 

 
1,536

 

 
1,536

Total available-for-sale debt securities
 
 
 
 
 
 
 
 
 
Amortized cost


3,580


46,141


657,500


707,221

Estimated fair value
$


$
3,674


$
49,089


$
678,171


$
730,934

(1) Actual maturities may differ from contractual maturities because issuers may have the rights to call or prepay obligations with or without prepayment penalties.

The following tables show 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 that are not deemed to be other-than-temporarily impaired, aggregated by investment class and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
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 Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed - GSE residential
$
3,988

 
$
4

 
1

 
$
27,889

 
$
188

 
5

 
$
31,877

 
$
192

 
6

Collateralized mortgage obligations - GSE residential
48,851

 
149

 
6

 
9,792

 
95

 
10

 
58,643

 
244

 
16

State and political subdivisions
2,952

 
4

 
3

 
146

 
1

 
1

 
3,098

 
5

 
4

Corporate bonds

 

 
0

 

 

 
0

 

 

 
0

Total temporarily impaired debt securities
$
55,791

 
$
157

 
10

 
$
37,827

 
$
284

 
16

 
$
93,618

 
$
441

 
26



 
 
17

Notes to Unaudited Consolidated Financial Statements
 

 
December 31, 2018
 
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 Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed - GSE residential
$
66,232

 
$
369

 
10

 
$
44,280

 
$
1,721

 
11

 
$
110,512

 
$
2,090

 
21

Collateralized mortgage obligations - GSE residential
4,639

 
42

 
1
 
68,362

 
1,729

 
20
 
73,001

 
1,771

 
21
State and political subdivisions
85,181

 
1,210

 
68
 
97,721

 
3,235

 
74
 
182,902

 
4,445

 
142
Corporate bonds
723

 
26

 
1

 

 

 
0

 
723

 
26

 
1

Total temporarily impaired debt securities
$
156,775

 
$
1,647

 
80

 
$
210,363

 
$
6,685

 
105

 
$
367,138

 
$
8,332

 
185



The unrealized losses on the Company’s investments in state and political subdivisions were caused by interest rate changes and adjustments in credit ratings. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The unrealized losses on the Company’s investments in collateralized mortgage-backed securities and corporate bonds were caused by interest rate changes and market assumptions about prepayment speeds.
The Company expects to recover the amortized cost basis over the term of the securities, excluding a previously disclosed impaired security. Because 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, the Company does not consider those investments to be other-than-temporarily impaired (‘‘OTTI’’) at September 30, 2019.
Gross gains of $506.2 thousand and $2.0 million and gross losses of $39.4 thousand and $1.4 million resulting from sales of available-for-sale securities were realized for the nine-months ended September 30, 2019 and 2018, respectively.
Equity Securities

Equity securities consist of Community Reinvestment Act mutual funds. The fair value of the equity securities was $2.2 million and $2.1 million at September 30, 2019 and December 31, 2018, respectively. Prior to January 1, 2019, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax. A net unrealized loss of $68.7 thousand had been recognized in accumulated other comprehensive income as of December 31, 2018. On January 1, 2019, the unrealized loss was reclassified out of accumulated other comprehensive income and into retained earnings with subsequent changes in fair value being recognized in other non-interest income. The following is a summary of the recorded fair value and the unrealized and realized gains and losses recognized in net income on available-for-sale equity securities:
 
September 30, 2019
 
Three months ended
 
Nine months ended
 
(Dollars in thousands)
Net gains recognized during the period on equity securities
$
16

 
$
72

Less: net gains recognized during the period on equity securities sold during the period

 

Unrealized gain recognized during the reporting period on equity securities still held at the reporting date
$
16

 
$
72



 
 
18

Notes to Unaudited Consolidated Financial Statements
 

Note 4:
Loans and Allowance for Loan Losses
Categories of loans at September 30, 2019 and December 31, 2018 include:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in thousands)
Commercial
$
1,312,647

 
$
1,134,414

Energy
396,132

 
358,283

Commercial real estate
993,153

 
846,561

Construction and land development
527,582

 
440,032

Residential real estate
365,435

 
246,275

Equity lines of credit
22,192

 
20,286

Consumer installment
21,552

 
23,528

Gross loans
3,638,693


3,069,379

Less: Allowance for loan losses
42,995

 
37,826

Less: Net deferred loan fees and costs
8,901


8,632

Net loans
$
3,586,797

 
$
3,022,921



The allowance for loan losses 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 allowance for loan losses 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 allowance 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 unclassified loans 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 following tables summarize the activity in the allowance for loan losses 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 Real Estate
 
Equity Lines of Credit
 
Consumer Installment
 
Total
 
(Dollars in thousands)
Three months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
22,975

 
$
7,300

 
$
7,533

 
$
2,602

 
$
2,138

 
$
155

 
$
149

 
$
42,852

Provision charged to expense
3,535

 
1,077

 
(249
)
 
414

 
82

 
5

 
(14
)
 
4,850

Charge-offs
(1,700
)
 
(3,000
)
 

 

 

 

 
(8
)
 
(4,708
)
Recoveries
1

 

 

 

 

 

 

 
1

Ending balance
$
24,811

 
$
5,377

 
$
7,284

 
$
3,016

 
$
2,220

 
$
160

 
$
127

 
$
42,995


 
 
19

Notes to Unaudited Consolidated Financial Statements
 


 
Commercial
 
Energy
 
Commercial Real Estate
 
Construction and Land Development
 
Residential Real Estate
 
Equity Lines of Credit
 
Consumer Installment
 
Total
 
(Dollars in thousands)
Three months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
11,739

 
$
7,957

 
$
6,584

 
$
2,530

 
$
1,103

 
$
170

 
$
114

 
$
30,197

Provision charged to expense
1,102

 
1,184

 
315

 
137

 
261

 
4

 
(3
)
 
3,000

Charge-offs
(97
)
 

 

 

 

 

 

 
(97
)
Recoveries
439

 

 

 

 

 

 
1

 
440

Ending balance
$
13,183

 
$
9,141

 
$
6,899

 
$
2,667

 
$
1,364

 
$
174

 
$
112

 
$
33,540


 
Commercial
 
Energy
 
Commercial Real Estate
 
Construction and Land Development
 
Residential Real Estate
 
Equity Lines of Credit
 
Consumer Installment
 
Total
 
(Dollars in thousands)
Nine months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
16,584

 
$
10,262

 
$
6,755

 
$
2,475

 
$
1,464

 
$
159

 
$
127

 
$
37,826

Provision charged to expense
11,166

 
(2,461
)
 
529

 
541

 
756

 
1

 
18

 
10,550

Charge-offs
(2,954
)
 
(3,000
)
 

 

 

 

 
(19
)
 
(5,973
)
Recoveries
15

 
576

 

 

 

 

 
1

 
592

Ending balance
$
24,811

 
$
5,377

 
$
7,284

 
$
3,016

 
$
2,220

 
$
160

 
$
127

 
$
42,995

 
Commercial
 
Energy
 
Commercial Real Estate
 
Construction and Land Development
 
Residential Real Estate
 
Equity Lines of Credit
 
Consumer Installment
 
Total
 
(Dollars in thousands)
Nine months ended September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
11,378

 
$
7,726

 
$
4,668

 
$
1,200

 
$
905

 
$
122

 
$
92

 
$
26,091

Provision charged to expense
2,031

 
2,671

 
2,231

 
1,467

 
459

 
77

 
64

 
9,000

Charge-offs
(681
)
 
(1,256
)
 

 

 

 
(25
)
 
(45
)
 
(2,007
)
Recoveries
455

 

 

 

 

 

 
1

 
456

Ending balance
$
13,183

 
$
9,141

 
$
6,899

 
$
2,667

 
$
1,364

 
$
174

 
$
112

 
$
33,540



 
 
20

Notes to Unaudited Consolidated Financial Statements
 

 
Commercial
 
Energy
 
Commercial Real Estate
 
Construction and Land Development
 
Residential Real Estate
 
Equity Lines of Credit
 
Consumer Installment
 
Total
 
(Dollars in thousands)
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
10,398

 
$
854

 
$
343

 
$

 
$
219

 
$

 
$

 
$
11,814

Collectively evaluated for impairment
$
14,413

 
$
4,523

 
$
6,941

 
$
3,016

 
$
2,001

 
$
160

 
$
127

 
$
31,181

Allocated to loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
66,162

 
$
10,226

 
$
16,544

 
$

 
$
2,537

 
$

 
$

 
$
95,469

Collectively evaluated for impairment
$
1,246,485

 
$
385,906

 
$
976,609

 
$
527,582

 
$
362,898

 
$
22,192

 
$
21,552

 
$
3,543,224

Ending balance
$
1,312,647

 
$
396,132

 
$
993,153

 
$
527,582

 
$
365,435

 
$
22,192

 
$
21,552

 
$
3,638,693


 
Commercial
 
Energy
 
Commercial Real Estate
 
Construction and Land Development
 
Residential Real Estate
 
Equity Lines of Credit
 
Consumer Installment
 
Total
 
(Dollars in thousands)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
5,814

 
$
3,108

 
$
473

 
$

 
$
5

 
$

 
$

 
$
9,400

Collectively evaluated for impairment
$
10,770

 
$
7,154

 
$
6,282

 
$
2,475

 
$
1,459

 
$
159

 
$
127

 
$
28,426

Allocated to loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
78,147

 
16,250

 
$
15,227

 
$

 
$
2,027

 
$

 
$

 
$
111,651

Collectively evaluated for impairment
$
1,056,267

 
$
342,033

 
$
831,334

 
$
440,032

 
$
244,248

 
$
20,286

 
$
23,528

 
$
2,957,728

Ending balance
$
1,134,414

 
$
358,283

 
$
846,561

 
$
440,032

 
$
246,275

 
$
20,286

 
$
23,528

 
$
3,069,379



Credit Risk Profile

The Company analyzes its loan portfolio based on an internal rating category (grades 1 - 8), portfolio segment and payment activity. These categories are utilized to develop the associated allowance for loan losses. A description of the loan grades and segments follows:
Loan Grades
Pass & Watch (risk rating 1 - 4) - Considered satisfactory. Includes borrowers that generally maintain good liquidity and financial condition or the credit is currently protected with sales trends remaining flat or declining. Most ratios compare favorably with industry norms and Company policies. Debt is programmed and timely repayment is expected.
Special Mention (risk rating 5) - Borrowers generally exhibit adverse trends in operations or an imbalanced position in their balance sheet that has not reached a point where repayment is jeopardized. Credits are currently protected but, if left uncorrected, the potential weaknesses may result in deterioration of the repayment prospects for the credit or in the Company’s credit or lien position at a future date. These credits are not adversely classified and do not expose the Company to enough risk to warrant adverse classification.
Substandard (risk rating 6) - Credits generally exhibit a 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.
Doubtful (risk rating 7) - Credits which exhibit weaknesses inherent in a substandard credit with the added characteristic that these weaknesses make collection or liquidation in full highly questionable and 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 - Includes loans to commercial customers for use in financing working capital needs, 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 - Includes loans to oil and natural gas customers for use in financing working capital needs, exploration and production activities, and acquisitions. The loans in this category 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.
Commercial Real Estate - Loans 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 company’s market areas.
Construction and Land Development - Loans 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 company’s market areas.
Residential Real Estate - The loans 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 company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over many borrowers.
Equity Lines of Credit - The loans are revolving lines of credit extended to consumers secured through a first or second mortgage on their personal residence. Repayment is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans may be impacted by economic conditions within the company’s market areas that may impact either property values or a borrower’s personal income.
Consumer Installment - The loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment comes from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’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 an internal rating category (grades 1 - 8), portfolio segment and payment activity:
 
Pass & Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(Dollars in thousands)
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
1,217,280

 
$
29,350

 
$
66,017

 
$

 
$

 
$
1,312,647

Energy
378,533

 
10,342

 
2,580

 
4,677

 

 
396,132

Commercial real estate
976,262

 
7,529

 
8,402

 
960

 

 
993,153

Construction and land development
527,582

 

 

 

 

 
527,582

Residential real estate
362,625

 
273

 
2,537

 

 

 
365,435

Equity lines of credit
22,192

 

 

 

 

 
22,192

Consumer installment
21,552

 

 

 

 

 
21,552

 
$
3,506,026

 
$
47,494

 
$
79,536

 
$
5,637

 
$

 
$
3,638,693

 
Pass & Watch
 
Special Mention
 
Substandard
 
Doubtful
 
Loss
 
Total
 
(Dollars in thousands)
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
1,056,505

 
$

 
$
73,824

 
$
4,085

 
$

 
$
1,134,414

Energy
339,720

 
5,376

 
13,187

 

 

 
358,283

Commercial real estate
831,290

 
6,950

 
7,209

 
1,112

 

 
846,561

Construction and land development
440,032

 

 

 

 

 
440,032

Residential real estate
244,178

 
70

 
2,027

 

 

 
246,275

Equity lines of credit
20,286

 

 

 

 

 
20,286

Consumer installment
23,528

 

 

 

 

 
23,528

 
$
2,955,539

 
$
12,396

 
$
96,247

 
$
5,197

 
$

 
$
3,069,379



The Company evaluates the loan risk grading system definitions, portfolio segment definitions and allowance for loan loss methodology on an ongoing basis. No significant changes were made to either during the past year.


 
 
21

Notes to Unaudited Consolidated Financial Statements
 

Loan Portfolio Aging Analysis
The following tables present the Company’s loan portfolio aging analysis of the recorded investment in loans as of September 30, 2019 and December 31, 2018:
 
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)
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
42,039

 
$
2,785

 
$
1,101

 
$
45,925

 
$
1,266,722

 
$
1,312,647

 
$

Energy
7,122

 

 
5,319

 
12,441

 
383,691

 
396,132

 
642

Commercial real estate
317

 

 
93

 
410

 
992,743

 
993,153

 

Construction and land development
12,345

 

 

 
12,345

 
515,237

 
527,582

 

Residential real estate
68

 

 
2,012

 
2,080

 
363,355

 
365,435

 

Equity lines of credit

 

 

 

 
22,192

 
22,192

 

Consumer installment
50

 

 

 
50

 
21,502

 
21,552

 

 
$
61,941

 
$
2,785

 
$
8,525

 
$
73,251

 
$
3,565,442

 
$
3,638,693

 
$
642

 
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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
1,040

 
$

 
$
4,137

 
$
5,177

 
$
1,129,237

 
$
1,134,414

 
$

Energy
1,994

 

 
9,218

 
11,212

 
347,071

 
358,283

 

Commercial real estate

 
425

 
2,253

 
2,678

 
843,883

 
846,561

 

Construction and land development

 

 

 

 
440,032

 
440,032

 

Residential real estate
28

 
194

 

 
222

 
246,053

 
246,275

 

Equity lines of credit

 

 

 

 
20,286

 
20,286

 

Consumer installment

 

 

 

 
23,528

 
23,528

 

 
$
3,062

 
$
619

 
$
15,608

 
$
19,289

 
$
3,050,090

 
$
3,069,379

 
$


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.

 
 
22

Notes to Unaudited Consolidated Financial Statements
 

The following tables present impaired loans for the periods ended September 30, 2019 and December 31, 2018:
 

 
Unpaid
 

 
Recorded Balance
 
Principal Balance
 
Specific Allowance
 
(Dollars in thousands)
September 30, 2019
 
 
 
 
 
Loans without a specific valuation
 
 
 
 
 
Commercial
$
25,770

 
$
25,770

 
$

Energy
2,969

 
2,969

 

Commercial real estate
12,501

 
12,501

 

Construction and land development

 

 

Residential real estate
2,195

 
2,195

 

Equity lines of credit

 

 

Consumer installment

 

 

Loans with a specific valuation
 
 
 
 
 
Commercial
40,392

 
40,392

 
10,398

Energy
7,257

 
7,257

 
854

Commercial real estate
4,043

 
4,043

 
343

Construction and land development

 

 

Residential real estate
342

 
342

 
219

Equity lines of credit

 

 

Consumer installment

 

 

Total
 
 
 
 
 
Commercial
66,162

 
66,162

 
10,398

Energy
10,226

 
10,226

 
854

Commercial real estate
16,544

 
16,544

 
343

Construction and land development

 

 

Residential real estate
2,537

 
2,537

 
219

Equity lines of credit

 

 

Consumer installment

 

 

 
$
95,469

 
$
95,469

 
$
11,814


 
 
23

Notes to Unaudited Consolidated Financial Statements
 

 

 
Unpaid
 

 
Recorded Balance
 
Principal Balance
 
Specific Allowance
 
(Dollars in thousands)
December 31, 2018
 
 
 
 
 
Loans without a specific valuation
 
 
 
 
 
Commercial
$
40,151

 
$
40,151

 
$

Energy
2,789

 
2,789

 

Commercial real estate
7,059

 
7,059

 

Construction and land development

 

 

Residential real estate
1,964

 
1,964

 

Equity lines of credit

 

 

Consumer installment

 

 

Loans with a specific valuation
 
 
 
 
 
Commercial
37,996

 
37,996

 
5,814

Energy
13,461

 
13,461

 
3,108

Commercial real estate
8,168

 
8,168

 
473

Construction and land development

 

 

Residential real estate
63

 
63

 
5

Equity lines of credit

 

 

Consumer installment

 

 

Total
 
 
 
 
 
Commercial
78,147

 
78,147

 
5,814

Energy
16,250

 
16,250

 
3,108

Commercial real estate
15,227

 
15,227

 
473

Construction and land development

 

 

Residential real estate
2,027

 
2,027

 
5

Equity lines of credit

 

 

Consumer installment

 

 

 
$
111,651

 
$
111,651

 
$
9,400



The table below shows interest income recognized during the three- and nine-month periods ended September 30, 2019 and September 30, 2018 for impaired loans held at the end of each period:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Commercial
$
386

 
$
402

 
$
862

 
$
1,110

Energy
98

 
93

 
324

 
369

Commercial real estate
200

 
88

 
613

 
291

Construction and land development

 

 

 

Residential real estate
8

 
17

 
17

 
52

Equity lines of credit

 

 

 

Consumer installment

 

 

 

Total interest income recognized
$
692

 
$
600

 
$
1,816

 
$
1,822



 
 
24

Notes to Unaudited Consolidated Financial Statements
 

The table below shows the average balance of impaired loans during the three- and nine-month periods ended September 30, 2019 and September 30, 2018 by loan category for impaired loans held at the end of each period:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
 
 
(Dollars in thousands)
Commercial
$
54,410

 
$
27,671

 
$
49,265

 
$
26,849

Energy
13,623

 
17,683

 
15,091

 
18,992

Commercial real estate
16,690

 
8,055

 
16,528

 
8,101

Construction and land development

 

 

 

Residential real estate
2,538

 
2,046

 
2,354

 
2,059

Equity lines of credit

 

 

 

Consumer installment

 

 

 

Total average impaired loans
$
87,261

 
$
55,455

 
$
83,238

 
$
56,001


Non-accrual Loans

Nonperforming loans are loans for which the Company does not record interest income. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well secured and in process of collection. 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 at September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in thousands)
Commercial
$
34,201

 
$
4,781

Energy
4,677

 
9,219

Commercial real estate
2,680

 
3,517

Construction and land development

 

Residential real estate
2,068

 
301

Equity lines of credit

 

Consumer installment

 

Total non-accrual loans
$
43,626

 
$
17,818



Troubled Debt Restructurings

Restructured loans are those extended to borrowers who are experiencing financial difficulty and who have been granted a concession. The modification of terms typically includes the extension of maturity, reduction or deferment of monthly payment, or reduction of the stated interest rate.

 
 
25

Notes to Unaudited Consolidated Financial Statements
 

The table below presents loans restructured during the three- and nine-months ended September 30, 2019 and 2018, including the post-modification outstanding balance and the type of concession made:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
 
(Dollars in thousands)
Commercial
 
 
 
 
 
 
 
- Deferred payment
$

 
$

 
$

 
$
61

- Reduction of monthly payment

 

 
994

 

- Extension of maturity date

 

 
30,005

 
300

Energy
 
 
 
 
 
 
 
- Reduction of monthly payment

 

 

 
2,972

Commercial real estate
 
 
 
 
 
 
 
- Reduction of monthly payment

 

 
3,767

 

- Interest rate reduction

 
1,153

 

 
2,256

Total troubled debt restructurings
$

 
$
1,153


$
34,766


$
5,589


As of September 30, 2019 and December 31, 2018, the Company had $896 thousand and $0, respectively, in commitments to borrowers whose terms have been modified in troubled debt restructurings. As of September 30, 2019, the modifications related to the troubled debt restructurings above did not impact the allowance for loan losses because the loans were previously impaired and evaluated on an individual basis or enough collateral was obtained to provide an additional commitment. The restructured loans had a total specific valuation allowance of $8.8 million and $2.4 million as of September 30, 2019 and December 31, 2018, respectively.
The balance of restructured loans is provided below as of September 30, 2019 and December 31, 2018. In addition, the balance of those loans that are in default at any time during the past twelve months at September 30, 2019 and December 31, 2018 is provided below:
 
September 30, 2019
 
December 31, 2018
 
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
7
 
$
36,865

 
$

 
6
 
$
5,022

 
$
55

Energy
2
 
2,969

 

 
2
 
3,631

 

Commercial real estate
3
 
4,947

 

 
2
 
1,382

 

Construction and land development
 

 

 
 

 

Residential real estate
 

 

 
1
 
237

 

Equity lines of credit
 

 

 
 

 

Consumer installment
 

 

 
 

 

Total restructured loans
12
 
$
44,781

 
$

 
11
 
$
10,272

 
$
55

(1) Default is considered to mean 90 days or more past due as to interest or principal.


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

 
 
26

Notes to Unaudited Consolidated Financial Statements
 

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.
During the quarter ended September 30, 2019, the Company changed an input associated with the fair market value related to derivatives not designated as hedges. The model utilized to calculate the non-performance risk, also known as the credit valuation adjustment, or CVA, was adjusted from a more conservative default methodology to a review of the historical defaults recognized by the Company. Management believes this change better aligns with the Company’s credit methodology and underwriting standards.
As a result of the change in methodology, the Company increased swap fee income, net by approximately $800 thousand, related to swaps closed on or before June 30, 2019. If no defaults occur for derivatives not designated as hedges, the change in methodology will lower future swap fee income, net by the same amount.
As of September 30, 2019 and December 31, 2018, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:
 
September 30, 2019
 
December 31, 2018
Product
Number of Instruments
 
Notional Amount
 
Number of Instruments
 
Notional Amount
 
(Dollars in thousands)
Back-to-back swaps
46
 
$
308,960

 
20
 
$
77,709


The table below presents the fair value of the Company’s derivative financial instruments and their classification on the Balance Sheet as of September 30, 2019 and December 31, 2018:
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
 
September 30,
 
December 31,
 
Balance Sheet
 
September 30,
 
December 31,
 
Location
 
2019
 
2018
 
Location
 
2019
 
2018
 
(Dollars in thousands)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate products
Other assets
 
$
13,735

 
$
1,051

 
Other liabilities
 
$
13,782

 
$
1,136


The effect of the Company’s derivative financial instruments that are not designated as hedging instruments are reported on the Statements of Income as swap fee income, net. The effect of the Company’s derivative financial instruments gain and loss are reported on the Statements of Cash Flows within other assets and other liabilities.
The tables below show a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2019 and December 31, 2018:
September 30, 2019
(Dollars in thousands)
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
Gross Amounts of Recognized Assets and Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Offsetting of derivative assets
 
 
 
 
 
 
 
 
 
 
Derivatives
$
13,735

 
$

 
$
13,735

 
$

 
$

 
$
13,735

Offsetting of derivative liabilities
 
 
 
 
 
 
 
 
Derivatives
$
13,782

 
$

 
$
13,782

 
$

 
$

 
$
13,782


 
 
27

Notes to Unaudited Consolidated Financial Statements
 

December 31, 2018
(Dollars in thousands)
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Statement of Financial Position
 
Gross Amounts of Recognized Assets and Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets presented in the Statement of Financial Position
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Offsetting of derivative assets
 
 
 
 
 
 
 
 
 
 
Derivatives
$
1,051

 
$

 
$
1,051

 
$
72

 
$

 
$
979

Offsetting of derivative liabilities
 
 
 
 
 
 
 
 
Derivatives
$
1,136

 
$

 
$
1,136

 
$
72

 
$

 
$
1,064


The net presentation above can be reconciled to the tabular disclosure of fair value.
As of September 30, 2019, the Company had minimum collateral posting thresholds with certain of its derivative counter-parties and had posted collateral of $18.2 million. If the Company had breached any of these provisions at September 30, 2019, it could have been required to settle its obligations under the agreements at their termination value of $13.8 million.
Note 6:
Interest-Bearing Deposits and Borrowings
The scheduled maturities, excluding interest, of the Company’s borrowings at September 30, 2019 were as follows:
 
September 30, 2019
 
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
$
822,439

 
$
216,486

 
$
105,559

 
$
52,055

 
$
25,215

 
$

 
$
1,221,754

Fed funds purchased & repurchase agreements
49,810

 

 

 

 

 

 
49,810

FHLB borrowings
24,000

 
76,500

 
16,500

 
39,704

 

 
151,100

 
307,804

Trust preferred securities(1)

 

 

 

 

 
912

 
912

 
$
896,249

 
$
292,986

 
$
122,059

 
$
91,759

 
$
25,215

 
$
152,012

 
$
1,580,280

(1) The contract value of the trust preferred securities is $2.5 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 and nine months ended September 30, 2019 and 2018, were as follows:
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 30,
 
September 30,
 
Affected Line Item in the
 
2019
 
2018
 
2019
 
2018
 
Statements of Income
 
(Dollars in thousands)
 
 
Unrealized gains on available-for-sale securities
$
34

 
$
195

 
$
467

 
$
608

 
Gain on sale of available for sale securities
Amount reclassified before tax
34

 
195

 
467

 
608

 
 
Less: tax effect
9

 
47

 
115

 
149

 
Income tax expense
Net reclassified amount
$
25

 
$
148

 
$
352

 
$
459

 
 


 
 
28

Notes to Unaudited Consolidated Financial Statements
 

Note 8:
Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Management believes that, as of September 30, 2019, the Company and the Bank meet all capital adequacy requirements to which they are subject.
The Company’s and the Bank’s actual capital amounts and ratios as of September 30, 2019 and December 31, 2018 are presented in the following table:
 
Actual
 
Minimum Capital Required - Basel III Phase-In Schedule
 
Minimum Capital Required - Basel III Fully Phase-In
 
Required to be Considered Well Capitalized
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
618,407

 
13.9
%
 
$
467,160

 
10.5
%
 
$
467,160

 
10.5
%
 
N/A

 
N/A

Bank
567,667

 
12.8

 
467,085

 
10.5

 
467,085

 
10.5

 
$
444,843

 
10.0
%
Tier I Capital to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
575,412

 
12.9

 
378,177

 
8.5

 
378,177

 
8.5

 
N/A

 
N/A

Bank
524,672

 
11.8

 
378,117

 
8.5

 
378,117

 
8.5

 
355,875

 
8.0

Common Equity Tier 1 to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
574,500

 
12.9

 
311,440

 
7.0

 
311,440

 
7.0

 
N/A

 
N/A

Bank
524,672

 
11.8

 
311,390

 
7.0

 
311,390

 
7.0

 
289,148

 
6.5

Tier I Capital to Average Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
575,412

 
12.6

 
183,152

 
4.0

 
183,152

 
4.0

 
N/A

 
N/A

Bank
$
524,672

 
11.5
%
 
$
183,109

 
4.0
%
 
$
183,109

 
4.0
%
 
$
228,886

 
5.0
%
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Capital to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
$
521,111

 
13.5
%
 
$
380,873

 
9.9
%
 
$
404,979

 
10.5
%
 
N/A

 
N/A

Bank
481,287

 
12.5

 
380,369

 
9.9

 
404,443

 
10.5

 
$
385,184

 
10.0
%
Tier I Capital to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
483,285

 
12.5

 
303,734

 
7.9

 
327,840

 
8.5

 
N/A

 
N/A

Bank
443,461

 
11.5

 
303,332

 
7.9

 
327,406

 
8.5

 
308,147

 
8.0

Common Equity Tier 1 to Risk-Weighted Assets
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
453,049

 
11.7

 
245,880

 
6.4

 
269,986

 
7.0

 
N/A

 
N/A

Bank
443,461

 
11.5

 
245,555

 
6.4

 
269,629

 
7.0

 
250,369

 
6.5

Tier I Capital to Average Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
483,285

 
12.4

 
155,538

 
4.0

 
155,538

 
4.0

 
N/A

 
N/A

Bank
$
443,461

 
11.4
%
 
$
155,420

 
4.0
%
 
$
155,420

 
4.0
%
 
$
194,275

 
5.0
%



 
 
29

Notes to Unaudited Consolidated Financial Statements
 

Note 9:
Revenue from Contracts with Customers
The Company adopted ASU 2014-09, ‘‘Revenue from Contracts with Customers (Topic 606)’’ and its related amendments as of January 1, 2019 using the modified retrospective approach. The implementation had no material impact on the measurement or recognition of revenue of either current or prior periods.
The categories are selected based on the nature, amount, timing, and uncertainty of revenue and cash flows. The following presents descriptions of revenue categories within the scope of ASU 2014-09 (ASC 606):
Service charges and fees (rebates) on customer accounts - This segment consists of monthly fees for the services rendered on customer deposit accounts, including maintenance charges, overdraft fees, and processing fees. The monthly fee structures are typically based on type of account, volume, and activity. The customer is typically billed monthly and pays the bill from their deposit account. The Company satisfies the performance obligation related to providing depository accounts monthly as transactions are processed and deposit service charge revenue is recorded.
ATM and credit card interchange income - This segment consists of fees charged for use of the Company’s ATMs, as well as, an interchange fee with credit card and debit card service providers. ATM fees and interchange fees are based on the number of transactions, as well as, the underlying agreements. Customers are typically billed monthly. The Company satisfies the performance obligation related to ATM and interchange fees monthly as transactions are processed and revenue is recorded.
International fees - This segment consists of fees earned from foreign exchange transactions and preparation of international documentation. International fees are based on underlying agreements that describe the Company’s performance obligation and the related fee. Customers are typically billed and cash is received once the service or transaction is complete. The Company satisfies the performance obligation related to international fees monthly as transactions are processed and revenue is recorded.
Other fees - This segment consists of numerous, smaller fees such as wire transfer fees, check cashing fees, and check printing fees. Other fees are typically billed to customers on a monthly basis. Performance obligations for other fees are satisfied at the time that the service is rendered.
The following table disaggregates the non-interest income subject to ASU 2014-09 by category:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Non-interest income subject to ASU 2014-09
 
 
 
 
 
 
 
Service charges and fees (rebates) on customer accounts
$
72

 
$
(100
)
 
$
441

 
$
506

ATM and credit card interchange income
476

 
301

 
1,312

 
827

International fees
199

 
160

 
506

 
579

Other fees
12

 
10

 
104

 
30

Total non-interest income from contracts with customers
759

 
371

 
2,363

 
1,942

Non-interest income not subject to ASU 2014-09
 
 
 
 
 
 
 
Other non-interest income
2,453

 
814

 
4,166

 
2,946

Total non-interest income
$
3,212

 
$
1,185

 
$
6,529

 
$
4,888




 
 
30

Notes to Unaudited Consolidated Financial Statements
 

Note 10:
Equity-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. In addition, the Company has an Employee Stock Purchase Plan that was indefinitely suspended effective April 1, 2019. The aggregate number of shares authorized for future issuance under the Omnibus Plan is 2,275,721 shares as of September 30, 2019.
The table below summarizes the stock-based compensation for the three and nine-months ended September 30, 2019 and 2018:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Stock appreciation rights
$
446

 
$
220

 
$
977

 
$
1,905

Performance based restricted units and stock
159

 
28

 
409

 
524

Restricted stock units
510

 
280

 
1,528

 
1,957

Restricted stock awards
209

 

 
656

 

Employee stock purchase plan

 
38

 
36

 
127

Total stock-based compensation
$
1,324

 
$
566

 
$
3,606

 
$
4,513



Note 11:
Income Tax
A reconciliation of the income tax expense (benefit) at the statutory rate to the Company’s actual income tax expense (benefit) is shown below:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Computed at the statutory rate (21%)
$
2,725

 
$
1,529

 
$
7,241

 
$
1,754

Increase (decrease) resulting from
 
 
 
 
 
 
 
Tax-exempt income
(722
)
 
(860
)
 
(2,147
)
 
(2,754
)
Nondeductible expenses
71

 
87

 
208

 
261

State tax credit

 

 
(1,361
)
 

State income taxes
566

 
124

 
1,526

 
245

Equity based compensation
(5
)
 

 
(66
)
 
(400
)
Other adjustments
(43
)
 
44

 
(93
)
 
(10
)
Actual tax expense (benefit)
$
2,592

 
$
924

 
$
5,308

 
$
(904
)



 
 
31

Notes to Unaudited Consolidated Financial Statements
 

The tax effects of temporary differences related to deferred taxes shown on the consolidated Balance Sheets are presented below:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in thousands)
Deferred tax assets
 
 
 
Net unrealized loss on securities available-for-sale
$

 
$
986

Allowance for loan losses
10,637

 
9,358

Lease incentive
306

 
329

Impairment of available for sale securities
498

 
498

Valuation allowance on real estate

 
396

Loan fees
2,202

 
2,135

Net operating loss carryover
370

 
398

Accrued expenses
105

 
1,927

Deferred compensation
2,317

 
1,838

Alternative minimum tax credits

 
2,365

State tax credit
3,517

 
2,506

Other
63

 
79

 
20,015

 
22,815

Deferred tax liability
 
 
 
Fair market value adjustments - trust preferred securities
(350
)
 
(356
)
Net unrealized gain on securities available-for-sale
(5,812
)
 

FHLB stock basis
(936
)
 
(739
)
Premises and equipment
(4,301
)
 
(5,019
)
Other
(1,187
)
 
(385
)
 
(12,586
)
 
(6,499
)
Net deferred tax asset
$
7,429

 
$
16,316



Note 12:
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 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.

 
 
32

Notes to Unaudited Consolidated Financial Statements
 

Recurring Measurements
The following tables present the fair value measurements of 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 September 30, 2019 and December 31, 2018:
 
 
 
September 30, 2019
 
 
 
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)
Available-for-sale securities
 
 
 
 
 
 
 
Mortgage-backed - GSE residential
$
160,714

 
$

 
$
160,714

 
$

Collateralized mortgage obligations - GSE residential
148,675

 

 
148,675

 

State and political subdivisions
420,009

 

 
420,009

 

Corporate bonds
1,536

 

 
1,536

 

Mutual funds
2,159

 

 
2,159

 

Derivative assets
13,735

 

 
13,735

 

Derivative liabilities
$
13,782

 
$

 
$
13,782

 
$

 
 
 
December 31, 2018
 
 
 
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)
Available-for-sale securities
 
 
 
 
 
 
 
Mortgage-backed - GSE residential
$
129,287

 
$

 
$
129,287

 
$

Collateralized mortgage obligations - GSE residential
152,626

 

 
152,626

 

State and political subdivisions
378,058

 

 
378,058

 

Corporate bonds
1,657

 

 
1,657

 

Mutual funds
2,050

 

 
2,050

 

Derivative assets
1,051

 

 
1,051

 

Derivative liabilities
$
1,136

 
$

 
$
1,136

 
$



Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis and recognized in the Company’s accompanying consolidated balance sheets.
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. Such securities are classified in Level 2 of the valuation hierarchy.

 
 
33

Notes to Unaudited Consolidated Financial Statements
 

Derivatives
Fair value of the interest rate swaps is obtained from independent pricing services based on quoted market prices for similar derivative contracts.
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 September 30, 2019 and December 31, 2018:
 
 
 
September 30, 2019
 
 
 
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
$
40,220

 
$

 
$

 
$
40,220

Premises and equipment held-for-sale

 

 

 

Foreclosed assets held for sale
$
2,471

 
$

 
$

 
$
2,471

 
 
 
December 31, 2018
 
 
 
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
$
50,288

 
$

 
$

 
$
50,288

Premises and equipment held-for-sale
3,444

 

 
3,444

 

Foreclosed assets held for sale
$

 
$

 
$

 
$



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. The impaired loans had a carrying value of $52.0 million and $59.7 million and were reduced by specific valuation allowance allocations totaling $11.8 million and $9.4 million at September 30, 2019 and December 31, 2018, respectively.
Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the Office of the Chief Credit Officer. Appraisals are reviewed for accuracy and consistency by the Office of the Chief Credit Officer. 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.
Premises and Equipment Held-for-Sale
The estimated fair value of premises and equipment held-for-sale is based on the appraised fair value of the collateral, less estimated cost to sell.

 
 
34

Notes to Unaudited Consolidated Financial Statements
 

Foreclosed Assets Held-for-Sale
The estimated 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 September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
Fair Value
 
Valuation Techniques
 
Unobservable Inputs
 
Range (Weighted Average)
 
(Dollars in thousands)
Collateral-dependent impaired loans
$
40,220

 
Market comparable properties
 
Marketability discount
 
10% - 15%
(12%)
Foreclosed assets held for sale
$
2,471

 
Market comparable properties
 
Marketability discount
 
25%
 
December 31, 2018
 
Fair Value
 
Valuation Techniques
 
Unobservable Inputs
 
Range (Weighted Average)
 
(Dollars in thousands)
Collateral-dependent impaired loans
$
50,288

 
Market comparable properties
 
Marketability discount
 
10% - 15%
(12%)
Foreclosed assets held for sale
$

 
 
 
 
 
 


The following tables present the estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
Carrying
 
Fair Value Measurements
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in thousands)
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
128,126

 
$
128,126

 
$

 
$

 
$
128,126

Available-for-sale securities
733,093

 

 
733,093

 

 
733,093

Loans, net of allowance for loan losses
3,586,797

 

 

 
3,607,276

 
3,607,276

Restricted equity securities
16,053

 

 

 
16,053

 
16,053

Interest receivable
15,909

 

 
15,909

 

 
15,909

Derivative assets
13,735

 

 
13,735

 

 
13,735

 
$
4,493,713

 
$
128,126

 
$
762,737

 
$
3,623,329

 
$
4,514,192

Financial Liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
3,658,108

 
$
513,832

 
$

 
$
3,162,740

 
$
3,676,572

Federal funds purchased and repurchase agreements
49,810

 

 
49,809

 

 
49,809

Federal Home Loan Bank advances
307,804

 

 
311,583

 

 
311,583

Other borrowings
912

 

 
2,054

 

 
2,054

Interest payable
4,643

 

 
4,643

 

 
4,643

Derivative liabilities
13,782

 

 
13,782

 

 
13,782

 
$
4,035,059

 
$
513,832

 
$
381,871

 
$
3,162,740

 
$
4,058,443


 
 
35

Notes to Unaudited Consolidated Financial Statements
 

 
December 31, 2018
 
Carrying
 
Fair Value Measurements
 
Amount
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars in thousands)
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
216,541

 
$
216,541

 
$

 
$

 
$
216,541

Available-for-sale securities
661,628

 

 
661,628

 

 
661,628

Loans, net of allowance for loan losses
3,022,921

 

 

 
3,027,930

 
3,027,930

Restricted equity securities
14,525

 

 

 
14,525

 
14,525

Interest receivable
14,092

 

 
14,092

 

 
14,092

Derivative assets
1,051

 

 
1,051

 

 
1,051

 
$
3,930,758

 
$
216,541

 
$
676,771

 
$
3,042,455

 
$
3,935,767

Financial Liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
3,208,097

 
$
484,284

 
$

 
$
2,696,212

 
$
3,180,496

Federal funds purchased and repurchase agreements
75,406

 

 
75,404

 

 
75,404

Federal Home Loan Bank advances
312,985

 

 
298,017

 

 
298,017

Other borrowings
884

 

 
2,022

 

 
2,022

Interest payable
2,868

 

 
2,868

 

 
2,868

Derivative liabilities
1,136

 

 
1,136

 

 
1,136

 
$
3,601,376

 
$
484,284

 
$
379,447

 
$
2,696,212

 
$
3,559,943



Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value categorized within level 2 or level 3 above and not yet disclosed:
Loans
The Company adopted ASU 2016-01 on January 1, 2019. In accordance with its requirements, the fair value of loans as of September 30, 2019 was measured using an exit price notion. Methodologies utilized for this financial statement period are as follows: (i) Income Approach: Fair value is determined based on a discounted cash flow analysis. The discounted cash flow analysis was based on the contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk; and (ii) Asset Approach: Fair value is determined based on the estimated values of the underlying collateral or individual analysis of receipts. This provides a better indication of value than the contractual income streams as these loans are not performing or exhibit strong signs indicative of non-performance. Fair value has been established in accordance with ASC 820, Fair Value Measurements and Disclosures, and is intended to represent the price that would be received in an orderly transaction between market participants as of the measurement date. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, at least one significant assumption not observable in the market was utilized. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Inputs to these valuation techniques are subjective in nature, involve uncertainties and require significant judgment and therefore cannot be determined with precision. Accordingly, the fair value estimates presented are not necessarily indicative of the amounts to be realized in a current market exchange.
For December 31, 2018, fair value was estimated by discounting the future cash flows using the market rates at which similar notes would be made to borrowers with similar credit ratings and for the same remaining maturities. The market rates used were based on current rates the Company would impose for similar loans and reflect a market participant assumption about risks associated with nonperformance, illiquidity, and the structure and term of the loans along with local economic and market conditions.
Restricted Equity Securities
Fair value is estimated at book value due to restrictions that limit the sale or transfer of such securities.

 
 
36

Notes to Unaudited Consolidated Financial Statements
 

Interest Receivable and Payable
The carrying amount approximates fair value. The carrying amount is determined using the interest rate, balance and last payment date.
Deposits
Fair value of term deposits is estimated by discounting the future cash flows using rates of similar deposits with similar maturities. The estimated fair value of demand, transaction, savings and money market deposits is the book value since rates are regularly adjusted to market rates and amounts are payable on demand at the reporting date.
Federal Home Loan Bank Advances
Fair value is estimated by discounting the future cash flows using rates of similar advances with similar maturities. These rates were obtained from current rates offered by FHLB.
Fed Funds Purchased and Repurchase Agreements
Fair value for fed funds purchased is book value. Fair value of repurchase agreements estimated by discounting the future cash flows using rates of similar maturities.
Other Borrowings
Fair value of the Company’s line of credit with another financial institution is estimated at book value due to its short-term nature. The estimated fair value for the Trust Preferred Securities is based on current borrowing rates currently available to the Company, considering the size and quality of the credit and liquidity of the debt as a security.
Note 13:
Commitments and Credit Risk
The Company had the following commitments at September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in thousands)
Commitments to originate loans
$
176,598

 
$
190,997

Standby letters of credit
35,699

 
32,439

Lines of credit
1,255,764

 
1,174,166

Future lease commitment
19,054

 
19,054

Total
$
1,487,115

 
$
1,416,656



Note 14:
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, result of operations and cash flows of the Company.

 
 
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Table of Contents

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 prospectus (File No. 333-232704) filed with the Securities & Exchange Commission (‘‘SEC’’) pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on August 15, 2019, related to The Company’s initial public offering (the ‘‘IPO Prospectus’’). Results of operations for the three- and nine-month periods ended September 30, 2019 are not necessarily indicative of results to be attained for any other period.
Unless we state otherwise or the context otherwise requires, references in the below section to ‘‘we,’’ ‘‘our,’’ ‘‘us,’’ ‘‘ourselves,’’ ‘‘our company,’’ and the ‘‘Company’’ refer to CrossFirst Bankshares, Inc., a Kansas corporation, its predecessors and its consolidated subsidiaries. References to ‘‘CrossFirst Bank’’ and the ‘‘Bank’’ refer to CrossFirst Bank, a Kansas chartered bank and our wholly-owned consolidated subsidiary.
On December 21, 2018, we effected a two-for-one split of our common stock in the form of a stock dividend, whereby each holder of our common stock received one additional share of common stock for each share owned as of the record date of December 19, 2018. The effect of the stock dividend on outstanding shares and per share figures has been retroactively applied to all periods presented in this Form 10-Q.
Recent Developments

We completed our initial public offering on August 19, 2019 in which we issued and sold 6,594,362 common shares including 844,362 shares pursuant to the underwriters’ partial exercise of their overallotment option. The common shares were sold at an initial public offering price of $14.50 per share. After deducting the underwriting discounts and offering expenses, the Company received total net proceeds of $87.0 million. The shares began trading on the Nasdaq Global Select Market under the symbol ‘‘CFB.’’
During the third quarter ended September 30, 2019, we accomplished the following:
Increased total assets $178.1 million or 4.0% during the quarter to $4.7 billion, driven by a $162.4 million or 4.7% increase in our loan portfolio.
Increased quarterly net income $945.0 thousand or 10.0% on a linked quarter basis, resulting in a quarterly return on average assets of 0.89% and return on average equity of 7.58%.
Achieved an efficiency ratio of 54.3% during the quarter.
Increased diluted earnings per share (‘‘EPS’’) 40% to $0.21 for the quarter from the same period in 2018.
Increased year-to-date 2019 diluted EPS to $0.61, an increase of 177% from the same period in 2018.

 
 
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Table of Contents

Selected Financial Data (unaudited)

Selected financial data for and as of our previous five quarters and for and as of the nine-months ended September 30, 2019 and 2018 is presented below:
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Nine Months Ended
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
September 30,
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Per Common Share Data
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.22

 
$
0.21

 
$
0.20

 
$
0.22

 
$
0.15

 
$
0.63

 
$
0.23

Diluted earnings per share
0.21

 
0.20

 
0.20

 
0.22

 
0.15

 
0.61

 
0.22

Book value per share
11.59

 
11.00

 
10.63

 
10.21

 
9.43

 
11.59

 
9.43

Tangible book value per share(1)
$
11.44

 
$
10.83

 
$
10.46

 
$
10.04

 
$
9.24

 
$
11.44

 
$
9.24

Selected Operating Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
Yield on securities - tax equivalent(2)
3.19
%
 
3.42
 %
 
3.59
%
 
3.61
%
 
3.58
 %
 
3.40
%
 
3.62
%
Yield on loans
5.53

 
5.66

 
5.75

 
5.56

 
5.35

 
5.64

 
5.25

Yield on interest-earning assets(2)
5.00

 
5.18

 
5.25

 
5.08

 
4.81

 
5.14

 
4.65

Cost of interest-bearing deposits
2.26

 
2.33

 
2.30

 
2.04

 
1.72

 
2.30

 
1.59

Cost of total deposits
1.94

 
1.99

 
1.96

 
1.70

 
1.42

 
1.96

 
1.35

Cost of funds
1.94

 
1.99

 
1.96

 
1.72

 
1.46

 
1.96

 
1.40

Net interest margin(2)
3.24

 
3.35

 
3.46

 
3.51

 
3.44

 
3.35

 
3.34

Return on average assets
0.89

 
0.86

 
0.91

 
1.06

 
0.70

 
0.89

 
0.37

Non-GAAP core operating return on average assets(3)
0.89

 
0.89

 
0.78

 
0.67

 
0.72

 
0.86

 
0.53

Return on average equity
7.58

 
7.78

 
7.98

 
9.03

 
6.68

 
7.76

 
3.51

Non-GAAP core operating return on average equity(4)
7.58

 
8.04

 
6.79

 
5.59

 
6.83

 
7.48

 
5.38

Non-interest expense to average assets
1.82

 
2.00

 
2.20

 
2.06

 
2.20

 
2.00

 
2.61

Efficiency ratio(5)
54.29

 
60.09

 
64.20

 
60.18

 
65.91

 
59.36

 
79.08

Non-GAAP core operating efficiency ratio(6)
54.29

 
59.40

 
64.20

 
62.61

 
65.54

 
59.13

 
72.24

Non-GAAP tax equivalent efficiency ratio(7)
53.43

 
59.10

 
63.10

 
59.02

 
64.31

 
58.38

 
76.82

Non-interest-bearing deposits to total deposits
14.05

 
14.28

 
14.36

 
15.10

 
17.99

 
14.05

 
17.99

Loans to deposits
99.23
%
 
96.74
 %
 
96.40
%
 
95.41
%
 
97.49
 %
 
99.23
%
 
97.49
%
Credit Quality Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses to total loans
1.18
%
 
1.24
 %
 
1.22
%
 
1.23
%
 
1.22
 %
 
1.18
%
 
1.22
%
Nonperforming assets to total assets
1.00

 
1.18

 
0.36

 
0.43

 
0.35

 
1.00

 
0.35

Nonperforming loans to total loans
1.22

 
1.45

 
0.40

 
0.58

 
0.48

 
1.22

 
0.48

Allowance for loan losses to nonperforming loans
97.12

 
85.20

 
307.27

 
212.30

 
256.65

 
97.12

 
256.65

Net charge-offs (recoveries) to average loans(8)
0.53
%
 
 %
 
0.09
%
 
0.03
%
 
(0.05
)%
 
0.21
%
 
0.09
%

 
 
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Table of Contents

 
Third
 
Second
 
First
 
Fourth
 
Third
 
Nine Months Ended
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
September 30,
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
Capital Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
Total stockholders’ equity to total assets
12.95
%
 
11.16
 %
 
11.26
%
 
11.94
%
 
11.03
 %
 
12.95
%
 
11.03
%
Tier 1 leverage ratio
12.57

 
10.87

 
11.15

 
12.43

 
11.39

 
12.57

 
11.39

Common equity tier 1 capital ratio
12.91

 
11.02

 
11.23

 
11.75

 
10.55

 
12.91

 
10.55

Tier 1 risk-based capital ratio
12.93

 
11.04

 
11.23

 
12.53

 
11.38

 
12.93

 
11.38

Total risk-based capital ratio
13.90
%
 
12.04
 %
 
12.20
%
 
13.51
%
 
12.32
 %
 
13.90
%
 
12.32
%
(1) Tangible common stockholders’ equity and tangible book value per share are non-GAAP financial measures. The most directly comparable GAAP measure is stockholders’ equity and book value per share. See ’’GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
(2) Tax exempt income (tax-free municipal securities) is calculated on a tax equivalent basis. The incremental tax rate used is 21.0%.
(3) Non-GAAP core operating income and non-GAAP core operating return on average assets are non-GAAP financial measures. The most directly comparable measure under GAAP is net income and return on average assets, respectively. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
(4) Non-GAAP core operating return on average equity is a non-GAAP financial measure. The most directly comparable GAAP financial measure is return on average equity. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
(5) We calculate efficiency ratio as non-interest expense divided by the sum of net interest income and non-interest income.
(6) Non-GAAP core operating efficiency ratio is a non-GAAP financial measure. The most directly comparable GAAP financial measure is the efficiency ratio. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
(7) Non-GAAP tax equivalent efficiency ratio is a non-GAAP financial measure. The most directly comparable measure is the efficiency ratio. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.
(8) Interim periods are annualized

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Non-GAAP financial measures are used by management to evaluate our performance. The non-GAAP financial measures that we discuss should not be considered in isolation or as a substitute for the most directly comparable financial measures calculated in accordance with GAAP. Moreover, the way we calculate these non-GAAP financial measures may differ from that of other companies reporting measures with similar names.
We calculate ‘‘non-GAAP core operating income’’ as net income adjusted to remove non-recurring or non-core income and expense items related to:
Restructuring charges associated with the transition of our former CEO - In connection with the departure of our former CEO in the second quarter of 2018, we incurred restructuring charges related to the acceleration of certain stock-based compensation and employee costs, some of which were adjusted in the fourth quarter of 2018.
Impairment charges associated with two buildings that were held-for-sale - We acquired a larger corporate headquarters to accommodate our business needs that eliminated the need for two smaller support buildings. The two smaller support buildings had been acquired recently and were extensively remodeled, which resulted in a difference between book and market value for those assets. We sold one of the buildings in 2018 and the other in the second quarter of 2019.
State tax credits - As a result of the purchase and improvement of our new corporate headquarters we received state tax credits.
The most directly comparable GAAP financial measure for non-GAAP core operating income is net income.
We calculate ‘‘non-GAAP core operating return on average assets’’ as non-GAAP core operating income (as defined above) divided by average assets. The most directly comparable GAAP financial measure is return on average assets, which is calculated as net income divided by average assets.

 
 
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Table of Contents

We calculate ‘‘non-GAAP core operating return on average equity’’ as non-GAAP core operating income (defined above) less preferred dividends divided by average common equity. The most directly comparable GAAP financial measure is return on average equity, which is calculated as net income less preferred dividends divided by average common equity.
We calculate ‘‘non-GAAP core operating efficiency ratio’’ as non-interest expense adjusted to remove non-recurring non-interest expenses as defined under non-GAAP core operating income divided by the sum of net interest income and non-interest income adjusted to remove non-recurring non-interest income as defined under non-GAAP core operating income. The most directly comparable GAAP financial measure is the efficiency ratio.
Management believes that non-GAAP core operating income, non-GAAP core operating return on average assets, non-GAAP core operating return on average equity and non-GAAP core operating efficiency ratio remove events that are not recurring and not part of core business activities and are useful analytical tools for investors to compare periods excluding these non-recurring or non-core income and charges.
The following table reconciles, as of the dates set forth below, net income to non-GAAP core operating income, non-GAAP core operating return on average assets, non-GAAP core operating return on average equity and non-GAAP core operating efficiency ratio:
 
Three Months Ended
 
Nine Months Ended
 
September
 
June
 
March
 
December
 
September
 
 
 
30,
 
30,
 
31,
 
31,
 
30,
 
September 30,
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Non-GAAP core operating income:
 
 
 
 
 
 
 
 
 
 
Net Income
$
10,384

 
$
9,439

 
$
9,350

 
$
10,334

 
$
6,354

 
$
29,173

 
$
9,256

Add: restructuring charges

 

 

 
(815
)
 

 

 
5,548

Less: tax effect(1)

 

 

 
(210
)
 

 

 
1,591

Restructuring charges, net of tax

 

 

 
(605
)
 

 

 
3,957

Add: fixed asset impairments

 
424

 

 

 
171

 
424

 
171

Less: tax effect(2)

 
109

 

 

 
44

 
109

 
44

 Fixed asset impairments, net of tax

 
315

 

 

 
127

 
315

 
127

Add: state tax credit(3)

 

 
(1,361
)
 
(3,129
)
 

 
(1,361
)
 

 Non-GAAP core operating income
$
10,384

 
$
9,754

 
$
7,989

 
$
6,600

 
$
6,481

 
$
28,127

 
$
13,340

 (1) Represents the tax impact of the adjustments above at a tax rate of 25.73%, plus a permanent tax benefit associated with stock-based grants that were exercised prior to our former CEO’s departure.
 (2) Represents the tax impact of the adjustments above at a tax rate of 25.73%.
 (3) No tax effect.


 
 
41

Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
September
 
June
 
March
 
December
 
September
 
 
 
30,
 
30,
 
31,
 
31,
 
30,
 
September 30,
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Non-GAAP core operating return on average assets:
 
 
 
 
 
 
 
 
 Non-GAAP core operating income
$
10,384

 
$
9,754

 
$
7,989

 
$
6,600

 
$
6,481

 
$
28,127

 
$
13,340

Average assets
4,610,958

 
4,402,002

 
4,168,243

 
3,884,642

 
3,588,876

 
4,395,356

 
3,363,230

Return on average assets
0.89
%
 
0.86
%
 
0.91
%
 
1.06
%
 
0.70
%
 
0.89
%
 
0.37
%
 Non-GAAP core operating return on average assets
0.89
%
 
0.89
%
 
0.78
%
 
0.67
%
 
0.72
%
 
0.86
%
 
0.53
%
Non-GAAP core operating return on average equity:
 
 
 
 
 
 
 
 
 Non-GAAP core operating income
$
10,384

 
$
9,754

 
$
7,989

 
$
6,600

 
$
6,481

 
$
28,127

 
$
13,340

Less: preferred dividends

 

 
175

 
525

 
525

 
175

 
1,575

 Non-GAAP core operating income available to common stockholders
10,384

 
9,754

 
7,814

 
6,075

 
5,956

 
27,952

 
11,765

Average common equity
$
543,827

 
$
486,880

 
$
466,506

 
$
430,881

 
$
346,025

 
$
499,354

 
$
292,589

Return on average equity
7.58
%
 
7.78
%
 
7.98
%
 
9.03
%
 
6.68
%
 
7.76
%
 
3.51
%
 Non-GAAP core operating return on average equity
7.58
%
 
8.04
%
 
6.79
%
 
5.59
%
 
6.83
%
 
7.48
%
 
5.38
%
Non-GAAP core operating efficiency ratio
 
 
 
 
 
 
 
 
Non-interest expense
$
21,172

 
$
21,960

 
$
22,631

 
$
20,166

 
$
19,875

 
$
65,763

 
$
65,589

Less: restructuring charges

 

 

 
(815
)
 

 

 
5,548

 Non-GAAP non-interest expense (numerator)
21,172

 
21,960

 
22,631

 
20,981

 
19,875

 
65,763

 
60,041

Net interest income
35,786

 
34,874

 
33,605

 
32,315

 
28,968

 
104,265

 
78,053

Non-interest income
3,212

 
1,672

 
1,645

 
1,195

 
1,185

 
6,529

 
4,888

Add: fixed asset impairments

 
424

 

 

 
171

 
424

 
171

 Non-GAAP operating revenue (denominator)
$
38,998

 
$
36,970

 
$
35,250

 
$
33,510

 
$
30,324

 
$
111,218

 
$
83,112

Efficiency ratio
54.29
%
 
60.09
%
 
64.20
%
 
60.18
%
 
65.91
%
 
59.36
%
 
79.08
%
 Non-GAAP core operating efficiency ratio
54.29
%
 
59.40
%
 
64.20
%
 
62.61
%
 
65.54
%
 
59.13
%
 
72.24
%

We calculate ‘‘tangible common stockholders’ equity’’ as total stockholders’ equity less goodwill and other intangible assets and preferred stock. The most directly comparable GAAP financial measure is total stockholders’ equity.
We calculate ‘‘tangible book value per share’’ as tangible common stockholders’ equity (as defined above) divided by the number of shares of our common stock outstanding at the end of the relevant period. The most directly comparable GAAP financial measure is book value per share.
Management believes that tangible stockholders’ equity and tangible book value per share are important to many investors in the marketplace who are interested in changes from period to period in our stockholders’ equity, exclusive of changes in intangible assets. The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible stockholders’ equity and presents tangible book value per share compared to book value per share:

 
 
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Table of Contents

 
Period Ended
 
September
 
June
 
March
 
December
 
September
 
30,
 
30,
 
31,
 
31,
 
30,
 
2019
 
2019
 
2019
 
2018
 
2018
 
(Dollars in thousands except per share data)
Tangible common stockholders’ equity:
 
 
 
 
 
 
 
 
Stockholders’ equity
$
602,435

 
$
499,195

 
$
480,514

 
$
490,336

 
$
409,780

 Less: goodwill and other intangible assets
7,720

 
7,745

 
7,770

 
7,796

 
7,821

Less: preferred stock

 

 

 
30,000

 
30,000

Tangible common stockholders’ equity
$
594,715

 
$
491,450

 
$
472,744

 
$
452,540

 
$
371,959

Tangible book value per share:
 
 
 
 
 
 
 
 
 
Tangible common stockholders’ equity
$
594,715

 
$
491,450

 
$
472,744

 
$
452,540

 
$
371,959

Shares outstanding at end of period
51,969,203

 
45,367,641

 
45,202,370

 
45,074,322

 
40,261,480

Book value per share
$
11.59

 
$
11.00

 
$
10.63

 
$
10.21

 
$
9.43

Tangible book value per share
$
11.44

 
$
10.83

 
$
10.46

 
$
10.04

 
$
9.24

We calculate ‘‘Non-GAAP tax equivalent efficiency ratio’’ as non-interest expense divided by the sum of net interest income on a tax equivalent basis and non-interest income. Management believes the tax equivalent efficiency ratio provides a better understanding of our efficiency ratio because it gives effect for our tax-exempt security strategy.
The following table reconciles, as of the dates set forth below, the efficiency ratio compared to the tax-equivalent efficiency ratio:
 
Three Months Ended
 
Nine Months Ended
 
September
 
June
 
March
 
December
 
September
 
 
 
30,
 
30,
 
31,
 
31,
 
30,
 
September 30,
 
2019
 
2019
 
2019
 
2018
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Non-GAAP Tax Equivalent Efficiency Ratio:
 
 
 
 
 
 
 
 
 Non-interest expense (Numerator)
$
21,172

 
$
21,960

 
$
22,631

 
$
20,166

 
$
19,875

 
$
65,763

 
$
65,589

Net interest income
35,786

 
34,874

 
33,605

 
32,315

 
28,968

 
104,265

 
78,053

Tax equivalent interest income
624

 
612

 
616

 
658

 
753

 
1,852

 
2,440

 Net interest income - tax equivalent
36,410

 
35,486

 
34,221

 
32,973

 
29,721

 
106,117

 
80,493

Non-interest income
3,212

 
1,672

 
1,645

 
1,195

 
1,185

 
6,529

 
4,888

 Total tax-equivalent income (Denominator)
$
39,622

 
$
37,158

 
$
35,866

 
$
34,168

 
$
30,906

 
$
112,646

 
$
85,381

Efficiency Ratio
54.29
%
 
60.09
%
 
64.20
%
 
60.18
%
 
65.91
%
 
59.36
%
 
79.08
%
 Non-GAAP Tax Equivalent Efficiency Ratio
53.43
%
 
59.10
%
 
63.10
%
 
59.02
%
 
64.31
%
 
58.38
%
 
76.82
%

 
 
43

Table of Contents

Results of Operations

Summary

The Company’s results of operations depend substantially on net interest income and non-interest income. Other factors contributing to the Company’s results of operations include its non-interest expense, such as salaries and employee benefits, occupancy and equipment and other miscellaneous operating expenses. The components of the Company’s results of operations were as follows for the periods shown:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
 
(Dollars in thousands)
Net interest income
$
35,786

 
$
28,968

 
23.5
 %
 
$
104,265

 
$
78,053

 
33.6
 %
Provision for loan losses
4,850

 
3,000

 
61.7

 
10,550

 
9,000

 
17.2

Non-interest income
3,212

 
1,185

 
171.1

 
6,529

 
4,888

 
33.6

Non-interest expense
21,172

 
19,875

 
6.5

 
65,763

 
65,589

 
0.3

Income taxes
2,592

 
924

 
180.5

 
5,308

 
(904
)
 
(687.2
)
Net income
$
10,384

 
$
6,354

 
63.4
 %
 
$
29,173

 
$
9,256

 
215.2
 %
Preferred dividends

 
525

 
(100.0
)
 
175

 
1,575

 
(88.9
)
Net income available to common shareholders
$
10,384

 
$
5,829

 
78.1
 %
 
$
28,998

 
$
7,681

 
277.5
 %
Non-GAAP core operating income(1)
$
10,384

 
$
6,481

 
60.2
 %
 
$
28,127

 
$
13,340

 
110.8
 %
 
 
 
 
 
 
 
 
 
 
 
 
(1) Non-GAAP core operating income is a non-GAAP financial measure. The most directly comparable measure under GAAP is net income. See ‘‘GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures’’ for a reconciliation of this measure.


 
 
44

Notes to Unaudited Consolidated Financial Statements
 

Net Interest Income

We present and discuss net interest income 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. The following table presents, for the period indicated, average balance sheet information, interest income, interest expense and the corresponding average yield and rates paid:
 
Three Months Ended
 
September 30,
 
2019
 
2018
 
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
$
335,045

 
$
2,263

 
2.68
%
 
$
304,937

 
$
2,454

 
3.19
%
Securities - tax-exempt(1)
392,644

 
3,592

 
3.63

 
447,333

 
4,338

 
3.85

Federal funds sold
16,315

 
89

 
2.16

 
20,674

 
110

 
2.10

Interest-bearing deposits in other banks
171,913

 
881

 
2.03

 
132,585

 
613

 
1.84

Gross loans, net of unearned income(2)(3)
3,540,707

 
49,327

 
5.53

 
2,523,107

 
34,012

 
5.35

Total interest-earning assets(1)
4,456,624

 
$
56,152

 
5.00
%
 
3,428,636

 
$
41,527

 
4.81
%
Allowance for loan losses
(43,327
)
 
 
 
 
 
(31,716
)
 
 
 
 
Other non-interest-earning assets
197,661

 
 
 
 
 
191,956

 
 
 
 
Total assets
$
4,610,958

 
 
 
 
 
$
3,588,876

 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
$
134,987

 
$
386

 
1.13
%
 
$
56,072

 
$
33

 
0.24
%
Savings and money market deposits
1,743,575

 
9,553

 
2.17

 
1,450,397

 
6,139

 
1.68

Time deposits
1,276,571

 
8,064

 
2.51

 
801,416

 
3,827

 
1.89

Total interest-bearing deposits
3,155,133

 
18,003

 
2.26

 
2,307,885

 
9,999

 
1.72

FHLB and short-term borrowings
345,794

 
1,703

 
1.95

 
397,252

 
1,772

 
1.77

Trust preferred securities, net of fair value adjustments
904

 
37

 
16.06

 
868

 
36

 
16.21

Non-interest-bearing deposits
535,467

 

 

 
491,942

 

 

Cost of funds
4,037,298

 
$
19,743

 
1.94
%
 
3,197,947

 
$
11,807

 
1.46
%
Other liabilities
29,833

 
 
 
 
 
14,904

 
 
 
 
Stockholders’ equity
543,827

 
 
 
 
 
376,025

 
 
 
 
Total liabilities and stockholders’ equity
$
4,610,958

 
 
 
 
 
$
3,588,876

 
 
 
 
Net interest income(1)
 
 
$
36,409

 
 
 
 
 
$
29,720

 
 
Net interest spread(1)
 
 
 
 
3.06
%
 
 
 
 
 
3.35
%
Net interest margin(1)
 
 
 
 
3.24
%
 
 
 
 
 
3.44
%
(1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal taxes. The incremental tax rate used is 21.0%.
(2) Loans, net of unearned income includes non-accrual loans of $43.6 million and $12.5 million as of September 30, 2019 and 2018, respectively.
(3) Loan interest income includes loan fees of $2.4 million and $1.8 million for the three months ended September 30, 2019 and 2018, 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.
 
Nine Months Ended
 
September 30,
 
2019
 
2018
 
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
$
334,272

 
$
7,447

 
2.98
%
 
$
273,525

 
$
6,447

 
3.15
%
Securities - tax-exempt(1)
378,651

 
10,672

 
3.77

 
484,090

 
14,062

 
3.88

Federal funds sold
18,714

 
345

 
2.46

 
18,782

 
281

 
2.00

Interest-bearing deposits in other banks
135,030

 
2,107

 
2.09

 
174,740

 
2,200

 
1.68

Gross loans, net of unearned income(2)(3)
3,373,118

 
142,319

 
5.64

 
2,275,039

 
89,262

 
5.25

Total interest-earning assets(1)
4,239,785

 
$
162,890

 
5.14
%
 
3,226,176

 
$
112,252

 
4.65
%
Allowance for loan losses
(41,329
)
 
 
 
 
 
(29,607
)
 
 
 
 
Other non-interest-earning assets
196,900

 
 
 
 
 
166,661

 
 
 
 
Total assets
$
4,395,356

 
 
 
 
 
$
3,363,230

 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
$
127,785

 
$
1,139

 
1.19
%
 
$
53,995

 
$
101

 
0.25
%
Savings and money market deposits
1,616,558

 
27,326

 
2.26

 
1,381,291

 
15,658

 
1.52

Time deposits
1,249,219

 
22,956

 
2.46

 
809,550

 
10,880

 
1.80

Total interest-bearing deposits
2,993,562

 
51,421

 
2.30

 
2,244,836

 
26,639

 
1.59

FHLB and short-term borrowings
366,708

 
5,240

 
1.91

 
381,166

 
5,020

 
1.76

Trust preferred securities, net of fair value adjustments
895

 
112

 
16.74

 
860

 
100

 
15.47

Non-interest-bearing deposits
508,888

 

 

 
402,850

 

 

Cost of funds
3,870,053

 
$
56,773

 
1.96
%
 
3,029,712

 
$
31,759

 
1.40
%
Other liabilities
22,762

 
 
 
 
 
10,929

 
 
 
 
Stockholders’ equity
502,541

 
 
 
 
 
322,589

 
 
 
 
Total liabilities and stockholders’ equity
$
4,395,356

 
 
 
 
 
$
3,363,230

 
 
 
 
Net interest income(1)
 
 
$
106,117

 
 
 
 
 
$
80,493

 
 
Net interest spread(1)
 
 
 
 
3.18
%
 
 
 
 
 
3.25
%
Net interest margin(1)
 
 
 
 
3.35
%
 
 
 
 
 
3.34
%
(1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal taxes. The incremental tax rate used is 21.0%.
(2) Loans, net of unearned income includes non-accrual loans of $43.6 million and $12.5 million as of September 30, 2019 and 2018, respectively.
(3) Loan interest income includes loan fees of $6.6 million and $5.1 million for the nine months ended September 30, 2019 and 2018, 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.


 
 
45

Table of Contents

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 period shown. Information is provided with respect to: (i) changes in volume (change in volume times old rate); (ii) changes in rates (change in rate times old volume); and (iii) changes in rate/volume (change in rate times the change in volume).
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2019 over 2018
 
September 30, 2019 over 2018
 
Average Volume
 
Yield/Rate
 
Net Change(2)
 
Average Volume
 
Yield/Rate
 
Net Change(2)
 
(Dollars in thousands)
Interest Income
 
 
 
 
 
 
 
 
 
 
 
Securities - taxable
$
227

 
$
(418
)
 
$
(191
)
 
$
1,364

 
$
(364
)
 
$
1,000

Securities - tax-exempt(1)
(509
)
 
(237
)
 
(746
)
 
(3,000
)
 
(390
)
 
(3,390
)
Federal funds sold
(24
)
 
3

 
(21
)
 
(1
)
 
65

 
64

Interest-bearing deposits in other banks
199

 
69

 
268

 
(562
)
 
469

 
(93
)
Gross loans, net of unearned income
14,136

 
1,179

 
15,315

 
45,980

 
7,077

 
53,057

Total interest income(1)
14,029

 
596

 
14,625

 
43,781

 
6,857

 
50,638

Interest Expense
 
 
 
 
 
 
 
 
 
 
 
Transaction deposits
97

 
256

 
353

 
277

 
761

 
1,038

Savings and money market deposits
1,397

 
2,017

 
3,414

 
3,024

 
8,644

 
11,668

Time deposits
2,728

 
1,509

 
4,237

 
7,209

 
4,867

 
12,076

Total interest-bearing deposits
4,222


3,782

 
8,004

 
10,510

 
14,272

 
24,782

FHLB and short-term borrowings
(241
)
 
172

 
(69
)
 
(195
)
 
415

 
220

Trust preferred securities, net of fair value adjustments
1

 

 
1

 
4

 
8

 
12

Total interest expense
3,982

 
3,954

 
7,936

 
10,319

 
14,695

 
25,014

Net interest income(1)
$
10,047

 
$
(3,358
)
 
$
6,689

 
$
33,462

 
$
(7,838
)
 
$
25,624

 
 
 
 
 
 
 
 
 
 
 
 
(1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal taxes. The incremental tax rate used is 21.0%.
(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.
Three months ended September 30, 2019 over 2018
For the three months ended September 30, 2019, net interest income increased $6.7 million or 22.5% from the same period in the prior year. Net interest income improved as a result of a $1.0 billion or 30.0% increase in average interest-earning assets offset by a 20 basis point decline in our net interest margin (‘‘NIM’’).
For the three months ended September 30, 2019, NIM was 3.24% compared to 3.44% in 2018. The declining margin was attributable to a rising interest rate environment in the third quarter of 2018 compared to two rate cuts by the Federal Open Market Committee (‘‘FOMC’’) in the third quarter of 2019. As a result, we experienced higher cost of funds as interest-bearing deposits repriced slower than our loan portfolio. The margin on gross loans, net of unearned income increased 18 basis points from 5.35% to 5.53% while the Company’s cost of funds increased 48 basis points from 1.46% to 1.94%. Changes in the yield and rate of interest-earning assets and interest-bearing liabilities decreased net interest income by $3.4 million.
Average volume for the three months ended September 30, 2019 compared to 2018 improved net interest income by $10.0 million. Average interest-earning assets were driven by a $1.0 billion or 40.3% increase in average loans. The growth in loans was primarily supported by a $847.2 million or 36.7% increase in interest-bearing deposits and a $43.5 million or 8.8% increase in non-interest-bearing deposits.

 
 
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Table of Contents

Nine months ended September 30, 2019 over 2018
For the nine-months ended September 30, 2019, net interest income increased $25.6 million or 31.8% from the same period in the prior year. Net interest income was driven by a $1.0 billion or 31.4% increase in average interest-earning assets. NIM increased 1 basis point as a result of four rate increases by the FOMC from March 2018 to December 2018, offset by two rate declines by the FOMC in July and September of 2019.
For the nine-months ended September 30, 2019, NIM was 3.35% compared to 3.34% in 2018. The yield on loans, net of unearned income increased 39 basis points to 5.64%, increasing interest income by $7.1 million offset by an increase in the cost of interest-bearing deposits of 71 basis points resulting in a $14.3 million increase in interest expense. While our margin improved, the overall impact of interest rates decreased net interest income by $7.8 million. Average volume for the nine-months ended September 30, 2019 compared to 2018 improved net interest income by $33.5 million. Average loans increased $1.1 billion or 48.3%, while average interest-bearing deposits increased $748.7 million or 33.4%. Net interest income reflects the Company’s strong balance sheet growth and maintenance of NIM.
As of September 30, 2019, approximately $223.8 million of time deposits mature in the fourth quarter at an average interest rate of 2.51%. An additional $331.2 million of time deposits mature during the first quarter of 2020 at an average interest of 2.67%.
Impact of Transition Away from LIBOR
The Company has loans, derivative contracts, and other financial instruments that directly or indirectly depend on LIBOR to establish an interest rate and/or value. This included $1.1 billion in loans tied to LIBOR as of September 30, 2019. LIBOR is expected to cease on December 31, 2021. The impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known; however, loans, securities, and derivatives indexed to LIBOR that mature after December 31, 2021 may be impacted. As a result, the Company established an internal committee to evaluate potential substitutions and the related financial impact to the Company.
Provision for Loan Losses

The provision for loan losses is a charge to earnings to maintain the allowance for loan losses at a level that reflects management’s assessment of the collectability of the loan portfolio. Net charge-offs (recoveries) represent a reduction (addition) to the allowance for loan losses for loans we believe are no longer collectible. The provision for loan losses was as follows for the periods shown:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
$ Change
 
% Change
 
(Dollars in thousands)
Provision for loan losses
$
4,850

 
$
3,000

 
$
1,850

 
61.7
%
 
$
10,550

 
$
9,000

 
$
1,550

 
17.2
%

The allowance for loan losses as of September 30, 2019 was $43.0 million compared to $33.5 million as of September 30, 2018. The increase of $9.5 million or 28.2% was primarily due to an increase in our loan portfolio as well as an increase in non-performing loans, partially offset by a reduction in the energy portfolio’s qualitative factors. The allowance as a percentage of loans was 1.18% at September 30, 2019 compared to 1.22% at September 30, 2018.

 
 
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Table of Contents

Non-Interest Income

The components of non-interest income were as follows for the periods shown:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
 
 
 
 
Change
 
 
 
 
 
Change
 
2019
 
2018
 
$
 
%
 
2019
 
2018
 
$
 
%
 
(Dollars in thousands)
Service charges and fees (rebates) on customer accounts
$
72

 
$
(100
)
 
$
172

 
NA

 
$
441

 
$
506

 
$
(65
)
 
(12.8
)%
Gain on sale of available for sale securities
34

 
195

 
(161
)
 
(82.6
)%
 
467

 
608

 
(141
)
 
(23.2
)
Impairment of premises and equipment held for sale

 
(171
)
 
171

 
(100.0
)
 
(424
)
 
(171
)
 
(253
)
 
NA

Gain on sale of loans
49

 
25

 
24

 
96.0

 
207

 
618

 
(411
)
 
(66.5
)
Income from bank-owned life insurance
476

 
513

 
(37
)
 
(7.2
)
 
1,416

 
1,511

 
(95
)
 
(6.3
)
Swap fee income, net
1,879

 
253

 
1,626

 
642.7

 
2,415

 
299

 
2,116

 
707.7

ATM and credit card interchange income
476

 
301

 
175

 
58.1

 
1,312

 
827

 
485

 
58.6

Other non-interest income
226

 
169

 
57

 
33.7

 
695

 
690

 
5

 
0.7

Total non-interest income
$
3,212

 
$
1,185

 
$
2,027

 
171.1
 %
 
$
6,529

 
$
4,888

 
$
1,641

 
33.6
 %

The changes in non-interest income were driven by the following:
Swap Fee Income, Net
Swap fee income, net includes both swap fees from the execution of new swaps and the credit valuation adjustment (‘‘CVA’’). During the quarter, the Company added several large swaps, resulting in $1.1 million of swap fees compared to $272.7 thousand of fees from several, smaller swaps in the third quarter of 2018. Year-to-date 2019 swap fee activity totaled $2.4 million compared to $335.9 thousand in the prior year. The back-to-back swap program increased in activity during 2019 as a result of attractive market conditions.
In addition, the increase included a change in the CVA methodology during the third quarter of 2019. Prior to the third quarter, a more conservative default methodology was used to account for non-performance risk. The Company moved to a review of historical defaults and internal credit analysis performed by the Company. The result was an increase to non-interest income of approximately $800 thousand related to swaps entered in previous quarters.
ATM and Credit Card Interchange Income
Increased income was driven by the expansion of our credit card program to our new and existing customers.
Service Charges and Fees on Customer Accounts
This category includes a rebate program implemented in the second quarter of 2018 that attracted additional funding for the Bank and account analysis fees that continue to grow with our customer base.
Gain on Sale of Available for Sale Securities
The Company sold $63.5 million and $149.3 million of securities for the nine months ended 2019 and 2018, respectively. The sales were a strategic decision by management to capitalize on attractive market conditions, balance taxable and tax-free municipal securities, and redeploy the proceeds into higher yielding loans.
Impairment of Premises and Equipment Held for Sale
During the second quarter of 2019, the Company sold its remaining assets held-for-sale. The assets sold for approximately $2.9 million resulting in an additional impairment of $424.4 thousand.

 
 
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Table of Contents

Non-Interest Expense

The components of non-interest expense were as follows for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
 
 
 
 
Change
 
 
 
 
 
Change
 
2019
 
2018
 
$
 
%
 
2019
 
2018
 
$
 
%
 
(Dollars in thousands)
Salary and employee benefits
$
14,256

 
$
12,652

 
$
1,604

 
12.7
 %
 
$
43,296

 
$
43,689

 
(393
)
 
(0.9
)%
Occupancy
2,080

 
2,132

 
(52
)
 
(2.4
)
 
6,301

 
6,199

 
102

 
1.6

Professional fees
427

 
766

 
(339
)
 
(44.3
)
 
1,923

 
2,421

 
(498
)
 
(20.6
)
Deposit insurance premiums
302

 
823

 
(521
)
 
(63.3
)
 
2,020

 
2,411

 
(391
)
 
(16.2
)
Data processing
649

 
528

 
121

 
22.9

 
1,868

 
1,470

 
398

 
27.1

Advertising
580

 
527

 
53

 
10.1

 
1,770

 
1,982

 
(212
)
 
(10.7
)
Software and communication
900

 
630

 
270

 
42.9

 
2,407

 
1,958

 
449

 
22.9

Depreciation and amortization
413

 
516

 
(103
)
 
(20.0
)
 
1,320

 
1,306

 
14

 
1.1

Other non-interest expense
1,565

 
1,301

 
264

 
20.3

 
4,858

 
4,153

 
705

 
17.0

Total non-interest expense
$
21,172

 
$
19,875

 
$
1,297

 
6.5
 %
 
$
65,763

 
$
65,589

 
$
174

 
0.3
 %

The changes in non-interest income were driven by the following:
Salary and Employee Benefits
Quarterly salary and employee benefit costs increased as a result of a rise in headcount in 2019 and a $758.2 thousand increase in equity-based compensation expense. Year-to-Date salary and employee benefit costs decline was driven by a $5.5 million management restructuring charge due to the transition of our former CEO in 2018, partially offset by a net increase of 15 employees between September 30, 2018 and 2019 to support our growth strategy.
Deposit Insurance Premiums
During 2018, the Deposit Insurance Fund Reserve Ratio exceeded the statutorily required minimum reserve ratio. As a result, the Company received a $664.1 thousand assessment credit. The credit resulted in lower costs on both a quarter-to-date and year-to-date basis from the prior year. Credits will be applied until the excess is exhausted. Excluding the credit, the deposit insurance premium increased approximately $143.0 thousand during the third quarter of 2019 compared to the same period in 2018. The FDIC uses a risk-based premium system to calculate the quarterly fee. Between 2018 and 2019 our rate was impacted by our strong asset growth and changes to our loan mix.
Professional Fees
The professional fees decrease was driven by a reduction in recruitment costs from the prior year as a result of management’s strategic initiative to reduce the use of consultants. In addition, the Company saw a reduction in external consulting fees as we finalized our IPO plans.
Software and Communication
Software and communication costs increased during 2019 as a result of our continued strategy to invest in technologies that are expected to increase operating efficiency in the short and long-term.
Data Processing
Data processing includes our core system provided by a third-party and other operational support systems. Our customer base, transaction volume and asset size increased, resulting in higher data processing costs.


 
 
49

Table of Contents

Advertising
Quarterly advertising costs increased from the previous year as the Company continued its rebranding process. Year-to-date advertising costs declined as a result of management’s strategic initiative to improve the efficiency and effectiveness of the Company’s targeted advertising.
Other non-interest expense
Other non-interest expense included an increase in commercial card costs that continue to increase as we grow our customer base. In addition, the Company had an increase in operational loan costs due to increased loan volume, types of loans originated or renewed and events related to foreclosed assets. Other non-interest expense also saw an increase in insurance costs due to our transition from a private to public company.
Income Taxes

Income tax expense (benefit) was as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
$ Change
 
% Change
 
(Dollars in thousands)
Income tax expense (benefit)
$
2,592

 
$
924

 
$
1,668

 
180.5
%
 
$
5,308

 
$
(904
)
 
$
6,212

 
NA
Effective tax rate
20.0
%
 
12.7
%
 
 
 
 
 
15.4
%
 
(10.8
)%
 
 
 
 

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, such as bank-owned life insurance and tax-exempt municipal securities, state tax credits, and permanent tax differences from equity-based compensation.
The $6.2 million increase between year-to-date September 30, 2018 and 2019 primarily relates to our $26.1 million increase in income before income taxes and a $334.0 thousand decline in permanent benefits associated with equity-based compensation that was partially offset by a $1.4 million state tax credit recorded in the first quarter of 2019. The state tax credit related to our purchase and improvement of our corporate headquarters.
Analysis of Financial Condition

Balance Sheet Summary

The following table summarizes select components of the Company’s Balance Sheet:
 
As of
 
Change
 
September 30, 2019
 
December 31, 2018
 
$
 
%
 
(Dollars in thousands)
Total assets
$
4,651,313

 
$
4,107,215

 
$
544,098

 
13.2
 %
Cash and cash equivalents
128,126

 
216,541

 
(88,415
)
 
(40.8
)
Available-for-sale securities
733,093

 
663,678

 
69,415

 
10.5

Gross loans, net of unearned income
3,629,792

 
3,060,747

 
569,045

 
18.6

Total deposits
3,658,108

 
3,208,097

 
450,011

 
14.0

Federal funds purchased and repurchase agreements
49,810

 
75,406

 
(25,596
)
 
(33.9
)
Federal Home Loan Bank advances
307,804

 
312,985

 
(5,181
)
 
(1.7
)
Total stockholders’ equity
$
602,435

 
$
490,336

 
$
112,099

 
22.9
 %

Assets grew primarily from loan growth, as well as, an increase in available-for-sale securities. Loan growth was driven by increases in commercial, commercial real estate, and residential real estate loans. During 2019, the Company

 
 
50

Table of Contents

purchased $157.5 million of securities, primarily made up of mortgage backed securities and tax-exempt municipal securities, which was offset by $112.2 million of sales, maturities, and pay downs. Purchases of available-for-sale securities during the third quarter were hampered by the current interest rate environment. The Company remains committed to identifying and purchasing high-quality securities with an appropriate yield. Increases in assets were offset by a reduction in cash and cash equivalents, which was part of a strategic decision to move assets to higher yielding areas.
Our increase in assets was funded primarily from an increase in total deposits that raised the loan to deposit ratio to 99.2% as of September 30, 2019. The increase in total deposits included a $212.1 million increase in time deposits and a $144.1 million increase in money market and savings deposits. The time deposit increase was driven by short-term, competitive rates that are expected to mature over the next two quarters. In addition to our increase in deposits, the Company successfully completed an initial public offering during the third quarter of 2019 and was the primary reason for the increase in total stockholders’ equity.
Security Portfolio

The Company’s investment portfolio is governed by the investment policy that sets objectives, limits, and liquidity requirements among other items. The investment strategy is generally updated annually in coordination with an investment advisor. The portfolio is maintained to serve as a contingent, on-balance sheet source of liquidity. The objective of the Company’s investment portfolio is to optimize earnings, manage credit risk, ensure adequate liquidity, manage interest rate risk, meet pledging requirements, and meet regulatory capital requirements. The investment portfolio is generally comprised of government sponsored entity securities and U.S. state and political subdivision securities; limits are set on all types of securities.

As of September 30, 2019, available-for-sale investments totaled $733.1 million, a $69.4 million increase from December 31, 2018 and a $28.3 million or 4.0% increase from June 30, 2019. The increase in investment securities was part of management’s strategy to manage liquidity and optimize income. For additional information, see ‘‘Note 3 - Securities’’ in the notes to unaudited consolidated financial statements.
Loan Portfolio

Loans consisted of the following as of the dates indicated:
 
September 30, 2019
 
December 31, 2018
 
September 30, 2019 vs. December 31, 2018
 
Amount
 
% of Gross Loans
 
Amount
 
% of Gross Loans
 
$
increase (decrease)
 
%
increase
(decrease)
 
(Dollars in thousands)
Commercial
$
1,312,647

 
36.1
%
 
1,134,414

 
36.9
%
 
$
178,233

 
15.7
 %
Energy
396,132

 
10.9

 
358,283

 
11.7

 
37,849

 
10.6

Commercial real estate
993,153

 
27.3

 
846,561

 
27.6

 
146,592

 
17.3

Construction and land development
527,582

 
14.5

 
440,032

 
14.3

 
87,550

 
19.9

Residential real estate
365,435

 
10.0

 
246,275

 
8.0

 
119,160

 
48.4

Equity lines of credit
22,192

 
0.6

 
20,286

 
0.7

 
1,906

 
9.4

Consumer installment
21,552

 
0.6

 
23,528

 
0.8

 
(1,976
)
 
(8.4
)
Gross loans
3,638,693

 
100.0
%
 
3,069,379

 
100.0
%
 
569,314

 
18.5

Less: Allowance for loan losses
42,995

 
 
 
37,826

 
 
 
5,169

 
13.7

Less: Net deferred loan fees and costs
8,901

 
 
 
8,632

 
 
 
269

 
3.1

Net loans
$
3,586,797

 
 
 
$
3,022,921

 
 
 
$
563,876

 
18.7
 %

As of September 30, 2019, gross loans increased $569.3 million or 18.5% from December 31, 2018 and increased $162.4 million or 4.7% on a linked quarter basis. The increase from December 31,2018 included $178.2 million in commercial loans. Our commercial portfolio remains well diversified with health care remaining our largest industry category at 12%.

 
 
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Commercial real estate was the second largest segment for growth during the first nine-months of 2019. Approximately 73% of the commercial real estate portfolio is located within the states of Kansas, Missouri, Oklahoma, and Texas, with Texas, our largest state concentration, representing 40% of the portfolio as of September 30, 2019. The commercial real estate portfolio remains well diversified. Retail is the largest segment in our real estate loan portfolio, representing 15% of the portfolio.
Our energy portfolio increased from year-end 2018 but declined as a percentage of our total portfolio from 11.7% at December 31, 2018 to 10.9% at September 30, 2019. The Company continues to identify and attract strong energy credits, but currently expects to see less activity in the fourth quarter of 2019.
Residential real estate growth was driven by developing relationships within our markets.
Allowance for Loan Losses (‘‘ALLL’’)

The ALLL is an amount required to cover net loan charge-offs plus the amount considered necessary by the Bank’s management to maintain the balance in the allowance at a level adequate to absorb expected loan losses in the existing loan portfolio. The ALLL is evaluated on at least a quarterly basis. We use a loan grading system and portfolio segmentation to group the portfolio. Each group is evaluated and adjusted for changes in historical trends that may impact the segment. The ALLL at September 30, 2019, 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:
 
September 30, 2019
 
December 31, 2018
 
Amount
 
Percent of Allowance to Total Allowance
 
Amount
 
Percent of Allowance to Total Allowance
 
(Dollars in thousands)
Commercial
$
24,811

 
57.7
%
 
16,584

 
43.9
%
Energy
5,377

 
12.5
%
 
10,262

 
27.1
%
Commercial real estate
7,284

 
16.9
%
 
6,755

 
17.9
%
Construction and land development
3,016

 
7.0
%
 
2,475

 
6.5
%
Residential real estate
2,220

 
5.2
%
 
1,464

 
3.9
%
Equity lines of credit
160

 
0.4
%
 
159

 
0.4
%
Consumer installment
$
127

 
0.3
%
 
127

 
0.3
%
Gross loans
$
42,995

 
100.0
%
 
37,826

 
100.0
%

Activity in the allowance for loan losses is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30, 2019
 
2019
 
2018
 
2019
 
2018
 
(Dollars in thousands)
Allowance for loan losses:
 
 
 
 
 
 
 
Balance at beginning of period
$
42,852

 
$
30,197

 
$
37,826

 
$
26,091

Provision for loan losses
4,850

 
3,000

 
10,550

 
9,000

Charge-offs:
 
 
 
 
 
 
 
Commercial
(1,700
)
 
(97
)
 
(2,954
)
 
(681
)
Energy
(3,000
)
 

 
(3,000
)
 
(1,256
)
Commercial real estate

 

 

 

Construction and land development

 

 

 

Residential real estate

 

 

 

Equity lines of credit

 

 

 
(25
)
Consumer installment
(8
)
 

 
(19
)
 
(45
)
Total charge-offs
(4,708
)
 
(97
)
 
(5,973
)
 
(2,007
)
Recoveries:
 
 
 
 
 
 
 
Commercial
1

 
439

 
15

 
455

Energy

 

 
576

 

Commercial real estate

 

 

 

Construction and land development

 

 

 

Residential real estate

 

 

 

Equity lines of credit

 

 

 

Consumer installment

 
1

 
1

 
1

Total recoveries
1

 
440

 
592

 
456

Net (charge-offs) recoveries
(4,707
)
 
343

 
(5,381
)
 
(1,551
)
Balance at end of period
$
42,995

 
$
33,540

 
$
42,995

 
$
33,540

Allowance for loan losses to total loans
1.18
%
 
1.22
 %
 
1.18
%
 
1.22
%
Allowance for loan losses to nonperforming loans
97.1

 
256.7

 
97.1

 
256.7

Net charge-offs (recoveries) to average loans(1)
0.53
%
 
(0.05
)%
 
0.21
%
 
0.09
%
(1) Interim periods annualized

For the quarter ended September 30, 2019, the Company charged off $1.7 million related to a previously disclosed non-performing commercial loan. In addition, the Company charged off $3.0 million related to one oil exploration and production credit.
Our ALLL as of September 30, 2019 increased $9.5 million or 28.2% from September 30, 2018 and increased $142.5 thousand or less than 1% from June 30, 2019. Year-over-year, the ALLL has increased primarily from the growth of our loan portfolio and an increase in our impaired loans, offset by a reduction in the energy portfolio’s qualitative factors. On a linked quarter basis, our ALLL was impacted by $4.7 million in net charge-offs, a decline in our reserve required for our impaired loans, and a reduction in qualitative factors impacting our commercial and energy portfolios. As a result, the Company took a $4.9 million provision during the third quarter of 2019. Our ALLL to total loans declined 6 basis points to 1.18% as our loan portfolio continued to grow.


 
 
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Table of Contents

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
iv.
Impaired securities
The table below summarizes our nonperforming assets and related ratios as of the dates indicated:
 
September 30,
2019
 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
(Dollars in thousands)
Non-accrual loans
$
43,626

 
$
50,044

 
$
13,018

 
$
17,818

 
$
12,625

Loans past due 90 days or more and still accruing
642

 
238

 

 

 
443

Total nonperforming loans
44,268

 
50,282

 
13,018

 
17,818

 
13,068

Foreclosed assets held for sale
2,471

 
2,471

 
2,471

 

 

Impaired securities

 

 

 

 

Total nonperforming assets
$
46,739

 
$
52,753

 
$
15,489

 
$
17,818

 
$
13,068

Nonperforming assets to total assets
1.00
%
 
1.18
%
 
0.36
%
 
0.43
%
 
0.35
%
Nonperforming loans to total loans
1.22
%
 
1.45
%
 
0.40
%
 
0.58
%
 
0.48
%
September 30, 2019 nonperforming assets to total assets increased 65 basis points from the prior year driven by one commercial loan restructured in the second quarter of 2019 and subsequently placed on non-accrual. On a linked quarter basis, our September 30, 2019 nonperforming assets to total assets declined from 1.18% at June 30, 2019 to 1.00%.
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, doubtful or loss. The definitions of substandard, doubtful and loss see ‘‘Note 4 - Loans and Allowance for Loan Losses’’ in the notes to unaudited consolidated financial statements. The following table summarizes our loans past due 30 - 89 days, classified assets and related ratios:
 
September 30,
2019
 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
 
(Dollars in thousands)
Loan Past Due Detail
 
 
 
 
 
 
 
 
 
30 - 59 days past due
$
61,941

 
$
15,967

 
$
30,450

 
$
3,062

 
$
19,838

60 - 89 days past due
2,785

 
7,640

 
616

 
619

 
6,505

Total 30 - 89 days past due
$
64,726

 
$
23,607

 
$
31,066

 
$
3,681

 
$
26,343

Loans 30 - 89 days past due to loans
1.78
%
 
0.68
%
 
0.95
%
 
0.12
%
 
0.96
%
Classified Loans
 
 
 
 
 
 
 
 
 
Substandard
$
79,536

 
$
79,190

 
$
92,450

 
$
96,247

 
$
48,845

Doubtful
5,637

 
9,115

 
5,083

 
5,197

 
5,502

Loss

 

 

 

 

Total classified loans
$
85,173


$
88,305


$
97,533


$
101,444


$
54,347

Classified Loans / (Total Capital + ALLL)
13.2
%
 
16.3
%
 
18.7
%
 
19.2
%
 
12.3
%

 
 
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Table of Contents

During the quarter ended, September 30, 2019 the Company experienced a $45.9 million increase in loans past due 30 to 59 days from $16.0 million to $61.9 million. The increase was driven by one commercial loan restructured during the second quarter of 2019 and subsequently placed on non-accrual, as well as, one construction and land development loan that was in the process of being renewed.
The Company's classified assets has trended down $16.3 million or 16.0% since December 31, 2018. The decline in classified assets is a combination of charge-offs, primarily from commercial and energy loans, and changes to loan risk ratings due to borrower improvements.
Deposits and Other Borrowings

Deposits and other borrowings are used to support our asset growth. Our strong asset growth requires us to place a greater emphasis on both interest and non-interest-bearing deposits. We attract and retain deposits by aggressively setting our deposit rates within our markets. Other borrowings supplement our core deposit strategy.
At September 30, 2019, our deposits totaled $3.7 billion, an increase of $450.0 million or 14.0% from December 31, 2018 and an increase of $74.0 million or 2.1% since June 30, 2019. Deposit growth was driven by competitive interest rates within our markets.
Other borrowings include repurchase agreements, fed funds purchased, FHLB borrowings, and our trust preferred security. At September 30, 2019, other borrowings totaled $358.5 million, a $30.7 million or 7.9% decline from December 31, 2018 and a $6.6 million decrease from June 30, 2019. The decline in other borrowings was driven by strong deposit growth and the successfully completed initial public offering.
Liquidity

The objective of the Company’s liquidity policy 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:
 
September 30, 2019
 
December 31, 2018
 
(Dollars in thousands)
On-balance sheet
 
 
 
Cash and cash equivalents
$
109,961

 
$
216,541

Unpledged securities available-for-sale
696,519

 
552,950

Total on-balance sheet liquidity
806,480

 
769,491

Off-balance sheet
 
 
 
FHLB available funds
157,302

 
68,704

Federal Reserve available funds
285,187

 
286,397

Other available funds
105,000

 
95,000

Total off-balance sheet liquidity
547,489

 
450,101

Total liquidity
$
1,353,969

 
$
1,219,592

On-balance sheet liquidity as a percent of assets
17.3
%
 
18.8
%
Total liquidity as a percent of assets
29.1
%
 
29.7
%


 
 
54

Notes to Unaudited Consolidated Financial Statements
 

Contractual Obligations

The following table presents our significant contractual cash obligations to third parties, debt and lease agreements and service obligations as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
Payments Due by Period
 
 
 
Less than
1 Year
 
1 to 2
Years
 
2 to 5
Years
 
More than
5 Years
 
Total
 
(Dollars in thousands)
Time deposits
$
822,439

 
$
216,486

 
$
182,832

 
$

 
$
1,221,757

Fed funds purchased & repurchase agreements
49,810

 

 

 

 
49,810

FHLB borrowings and line of credit
24,000

 
76,500

 
56,204

 
151,100

 
307,804

Trust preferred security

 

 

 
2,500

 
2,500

Operating leases
1,718

 
1,564

 
4,607

 
6,479

 
14,368

Total
$
897,967

 
$
294,550

 
$
243,643

 
$
160,079

 
$
1,596,239

 
December 31, 2018
 
Payments Due by Period
 
 
 
Less than
1 Year
 
1 to 2
Years
 
2 to 5
Years
 
More than
5 Years
 
Total
 
(Dollars in thousands)
Time deposits
$
444,824

 
$
287,451

 
$
267,856

 
$
9,546

 
$
1,009,677

Fed funds purchased & repurchase agreements
75,406

 

 

 

 
75,406

FHLB borrowings and line of credit
44,000

 
45,000

 
72,885

 
151,100

 
312,985

Trust preferred security

 

 

 
2,500

 
2,500

Operating leases
1,876

 
1,633

 
4,812

 
7,450

 
15,771

Total
$
566,106

 
$
334,084

 
$
345,553

 
$
170,596

 
$
1,416,339


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. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Management believes that, as of September 30, 2019, the Company and the Bank meet all capital adequacy requirements to which they are subject. For additional information, see ‘‘Note 8 - Regulatory Matters’’ in the notes to unaudited consolidated financial statements.
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. These off-balance sheet arrangements include commitments to fund loans, standby letters of credit, and a previously disclosed future lease obligation in Kansas City, Missouri.

 
 
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Table of Contents

The following is a summary of our off-balance sheet commitments as of the dates presented:
 
 
September 30, 2019
 
December 31, 2018
 
 
(Dollars in thousands)
Commitments to fund C&I loans
 
$
507,195

 
$
597,534

Other loan commitments
 
925,167

 
767,629

Standby letters of credit
 
35,699

 
32,439

Lease agreements
 
19,054

 
19,054

Total
 
$
1,487,115

 
$
1,416,656


Critical Accounting Policies

The Company identified several accounting policies that are critical to an understanding of our financial condition and results of operations. In addition, 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’’ in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the IPO Prospectus. There have been no changes in the Company’s application of critical accounting policies since June 30, 2019.
Recent Accounting Pronouncements
The Company had the following updates to recent accounting pronouncements during the quarter. For additional information on accounting pronouncements, see Note 1 - Nature of Operations and Summary of Significant Accounting Policies. A complete list of recent, applicable accounting pronouncements was provided in the Company’s IPO Prospectus.
ASU 2016-13, Financial Instruments - Credit Losses - The Company established a committee of individuals from applicable departments to oversee the implementation process. The committee chose a third-party software solution. By the third quarter of 2019, the Company completed the software implementation phase of the transition. The software implementation phase included data capture and portfolio segmentation amongst other items. The Company completed a parallel run using 2019 data and expects to complete a second parallel run using third quarter data during the fourth quarter of 2019. At this time an estimate of the impact to the Company’s financial statements is not known, but the 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 plans to apply the update as of the beginning of the period of adoption and is not planning 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. Current operating leases relate primarily to three branch locations. Based on these current leases, the Company anticipates recognizing a lease liability and related right-to-use asset on our balance sheet, with an immaterial impact on the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A primary component of market risk is interest rate volatility. Managing interest rate risk is a key element of the Company’s balance sheet management. Interest rate risk is the risk that net interest margin 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 Bank’s Funds Management Committee (‘‘FMC’’) in accordance with policies approved by the Bank’s board of directors. The FMC uses a combination of three systems to measure the

 
 
56

Table of Contents

balance sheet’s interest rate risk position. Because each system serves a different purpose and provides a different perspective, the three systems in combination are expected to provide a better overall result than a single system alone. The three systems include: (i) gap reports; (ii) earnings simulation; and (iii) economic value of equity. 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:
Hypothetical Change in Interest Rate - Rate Shock
 
September 30, 2019
 
September 30, 2018
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
12.0
 %
 
(2.6
)%
 
10.3
 %
 
(8.3
)%
+200
8.6

 
(0.4
)
 
7.1

 
(4.6
)
+100
4.7

 
0.5

 
3.8

 
(0.8
)
Base

 

 

 

-100
(5.0
)
 
0.1

 
(4.2
)
 
(1.1
)
-200
(11.3
)%
 
1.2
 %
 
(6.2
)%
 
0.3
 %
Hypothetical Change in Interest Rate - Rate Ramp
 
September 30, 2019
 
September 30, 2018
Change in Interest Rate
(Basis Points)
Percent change in net interest income
 
Percent change in net interest income
+300
7.4
 %
 
4.9
 %
+200
5.1

 
3.4

+100
2.6

 
1.7

Base

 

-100
(2.8
)
 
(1.8
)
-200
(6.2
)%
 
(3.6
)%

The hypothetical change in net interest income as of September 30, 2019 in a down or up 100 basis point shock is mainly due to approximately 67% of earning assets repricing or maturing over the next 12 months. Loans remain the largest portion of our adjustable earning assets, as the mix of adjustable loans to total loans was 71.5%. The amount of adjustable loans causes the Company to see an increase in net interest income in a rising rate environment and a decline in net interest income in a declining rate environment.

The models the Company uses include assumptions regarding interest rates and balance changes.  These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results 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.

 
 
57

Notes to Unaudited Consolidated Financial Statements
 

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 September 30, 2019. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.
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 third quarter of 2019 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

There were no material changes from the risks disclosed in the Risk Factors section of the IPO Prospectus (File No. 333-232704), dated August 14, 2019, filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, as amended, on August 15, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

During the quarter ended September 30, 2019 and prior to September 13, 2019 (the date of the filing of our registration statement on Form S-8), we issued and sold an aggregate of 5,883 shares of our common stock to current employees at a weighted average exercise price of $17.00 per share pursuant to our partner share purchase program for aggregate cash consideration of $100.0 thousand. The shares were issued pursuant to an exemption under Rule 701 promulgated under the Securities Act. Each of the recipients of securities in these transactions had adequate access, through employment, to information about us.

During the quarter ended September 30, 2019 and prior to September 13, 2019 (the date of the filing of our registration statement on Form S-8), we issued 31,575 stock settled appreciation rights (‘‘SSARs’’) under our 2018 Equity Incentive Plan at a weighted average exercise price of $14.41 per unit. The SSARs vest in seven equal annual installments commencing in August 2020 and expire in August 2029.

In addition, during the quarter ended September 30, 2019 and prior to the filing of our Form S-8, we issued and sold to our employees an aggregate of 1,317 shares of common stock upon the exercise of SSARs issued under our 2018 Equity Incentive Plan at a weighted-average exercise price of $8.25 and a $17.00 price of the underlying security. The Company

 
 
58

Table of Contents

withheld an aggregate of 599 shares of common stock subject to such SSARs for payment of the exercise price and satisfaction of the aggregate tax withholding obligations in connection with the exercises of certain of those SSARs.

The SSARs and the common stock issuable upon the exercise of such SSARs were issued under the 2018 Equity Incentive Plan in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. Each of the recipients of securities in these transactions had adequate access, through employment, to information about us.

Use of Proceeds from our Initial Public Offering of Common Stock

On August 19, 2019, we completed our IPO, in which we sold 6,594,362 shares of common stock, including 844,362 shares pursuant to the underwriters' overallotment option, at price to the public of $14.50 per share. We received aggregate net proceeds of $87.0 million, net of underwriting discounts and commissions of $6.2 million and offering expenses paid by us of approximately $2.4 million subject to certain cost reimbursements. The offering has terminated. We distributed $50 million of the proceeds to our wholly-owned subsidiary, CrossFirst Bank, to support its growth. The balance of the proceeds for the offering was held at the Company and used for general corporate purposes. We made no payments to our directors, officers or persons owning ten percent or more of our common stock or to their associates, or to our affiliates in connection with the issuance and sale of the securities registered. We did not receive any proceeds from the sale of shares by the selling stockholders.

All the shares issued and sold in the initial public offering were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No. 333-232704), which was declared effective by the SEC on August 14, 2019. Pursuant to the Registration Statement, we registered an aggregate of 7,855,951 shares of our common stock, inclusive of the underwriters’ option to purchase additional shares and the shares to be offered by selling stockholders. Keefe, Bruyette & Woods, A Stifel Company, Raymond James & Associates, Inc. and Stephens Inc. acted as joint book-running managers for the offering, and Sandler O’Neill + Partners, L.P. acted as co-manager of the offering.
There has been no material change in the planned use of the proceeds of the initial public offering as described in our IPO Prospectus (File No. 333-232704) filed with the SEC on August 15, 2019, pursuant to Rule 424(b) of the Securities Act. The Company intends to use the net proceeds from the offering to support our growth, organically or through mergers and acquisitions, and for general corporate purposes. As previously disclosed, the Company is currently considering using a portion of the net proceeds for the opening of a second smaller full-service branch in the Dallas MSA, in addition to consistently evaluating other strategic opportunities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

The Board of Directors of the Company has established May 12, 2020 as the date of the Company’s 2020 Annual Meeting of Stockholders (the “2020 Annual Meeting”). The time and location of the 2020 Annual Meeting will be specified in the Company’s 2020 proxy statement.



 
 
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ITEM 6. EXHIBITS

 
 
 
 
Incorporated by Reference
Exhibit Number
 
Exhibit Description
 
Form
 
Exhibit
 
Filing Date/Period End Date
 
 
S-1
 
10.1
 
July 18, 2019
 
 
S-1
 
10.2
 
July 18, 2019
 
 
S-1
 
10.3
 
July 18, 2019
 
 
S-1
 
10.4
 
July 18, 2019
 
 
S-1
 
10.5
 
July 18, 2019
 
 
S-1
 
10.6
 
July 18, 2019
 
 
S-1
 
10.7
 
July 18, 2019
 
 
S-1
 
10.8
 
July 18, 2019
 
 
S-1
 
10.9
 
July 18, 2019
 
 
S-1
 
10.10
 
July 18, 2019
 
 
S-1
 
10.11
 
July 18, 2019
 
 
S-1
 
10.12
 
July 18, 2019
 
 
S-1
 
10.13
 
July 18, 2019
 
 
S-1
 
10.14
 
July 18, 2019
 
 
S-1
 
10.15
 
July 18, 2019
 
 
S-1
 
10.16
 
July 18, 2019
 
 
S-1
 
10.17
 
July 18, 2019
 
 
S-1
 
10.18
 
July 18, 2019
 
 
S-1
 
10.19
 
July 18, 2019
 
 
S-1
 
10.20
 
July 18, 2019
 
 
S-1
 
10.21
 
July 18, 2019
 
 
S-1
 
10.22
 
July 18, 2019
 
 
S-1
 
10.23
 
July 18, 2019
 
 
S-1
 
10.24
 
July 18, 2019
 
 
S-1
 
10.25
 
July 18, 2019

 
 
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Incorporated by Reference
Exhibit Number
 
Exhibit Description
 
Form
 
Exhibit
 
Filing Date/Period End Date
 
 
S-1
 
10.26
 
July 18, 2019
 
 
S-1
 
10.27
 
July 18, 2019
 
 
S-1
 
10.28
 
July 18, 2019
 
 
S-1
 
21.1
 
July 18, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
 
 
 
 
 

* Filed Herewith
**Furnished Herewith
† Indicates a management contract or compensatory plan


 
 
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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
 
CrossFirst Bankshares Inc.
 
 
 
 
 
 
November 12, 2019
 
 
 
 
/s/ David O’Toole
 
 
 
 
 
David O’Toole
 
 
 
 
 
Chief Financial Officer
 
 
 
 
 
(Principal Financial Officer and Principal Accounting Officer)
 
 
 
 
 
 


 
 
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