CROSSFIRST BANKSHARES, INC. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes and with the statistical information and financial data appearing in this report as well as in the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theSecurities and Exchange Commission ("SEC") onFebruary 26, 2021 (the "2020 Form 10-K"). Results of operations for the three- and six-month periods endedJune 30, 2021 are not necessarily indicative of results to be attained for any other period. Certain statements in this report contain forward-looking statements regarding our future plans, objectives, beliefs, expectations, representations and projections. See "Forward-Looking Information" which is incorporated herein by reference. Actual results could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in Item 1A - "Risk Factors" in the 2020 Form 10-K. Unless we state otherwise or the context otherwise requires, references in the below section to "we," "our," "us," "ourselves," "our company," and the "Company" refer toCrossFirst Bankshares, Inc. , and its consolidated subsidiaries. References to "CrossFirst Bank " and the "Bank" refer toCrossFirst Bank , our wholly-owned consolidated bank subsidiary. Second Quarter 2021 Highlights During the second quarter endedJune 30, 2021 , we accomplished the following: •Net income of$15.6 million , representing a return on average assets of 1.10% and a return on average equity of 9.86%; •Efficiency ratio of 53.6% for the second quarter of 2021; •Completed the$20 million share repurchase program at a weighted average price of$12.68 per share; •Book value per share of$12.50 atJune 30, 2021 compared to$11.66 atJune 30, 2020 ; •Expanded toPhoenix, Arizona ; and •HiredBen Clouse as our Chief Financial Officer.Mr. Clouse previously served as Chief Financial Officer of Waddell & Reed Financial, Inc., a financial services firm, from 2018 until its acquisition in 2021. Update on the COVID-19 Global Pandemic ("COVID-19") Impact The COVID-19 pandemic has caused, and may continue to cause, economic uncertainty and a disruption to the financial markets, the duration and extent of which is not currently known. A discussion of the impact of the COVID-19 pandemic on the Company and its operations and measures undertaken by the Company in response thereto is provided below. Bank Operations The Company implemented certain business continuity procedures inMarch 2020 as a result of the COVID-19 pandemic. InApril 2021 , substantially all employees returned to on-premise work and the Company is evaluating hybrid working opportunities. In addition, the bank lobbies were re-opened to the public. The Company remains ready to appropriately respond to changes, including federal, state and local requirements in the event of the COVID-19 pandemic's resurgence. No material interruptions to our business operations have occurred to date. Paycheck Protection Program ("PPP") Lending Facility and Loans The PPP was established by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") inMarch 2020 and authorized forgivable loans to small businesses. The Bank provided PPP loans to support current customers and foster relationships with new customers. The loans earn interest at 1%, include fees between 1% and 5% and typically mature in two years. PPP loans received a 0% risk weight under the regulatory capital rules which resulted in increased Common Equity Tier 1, Tier 1, and Tier 2 capital ratios, but the PPP loans are included in the calculation of our Leverage ratio. The Consolidated Appropriations Act of 2021 allocated additional PPP loan funding.The Small Business Administration ("SBA") reopened PPP funds inJanuary 2021 . The second round of PPP loans had similar terms to the first round of PPP loans mentioned above, but typically mature in five years. The PPP loans were available throughMay 5, 2021 . The SBA will continue to fund outstanding, approved PPP applications. 36
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Table of Contents The following table summarizes the impact of the PPP loans on our financials:
As of or for the Three Months Ended As of or for the Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(Dollars in thousands)
PPP Loan Activity
Outstanding loan balance,
beginning $ 336,355 $ - $ 292,230 $ -
Loan originations and funding 22,816 369,022 133,778 369,022
Loan payoffs (162,087) - (228,924) -
Outstanding loan balance, end $ 197,084 $ 369,022 $ 197,084 $ 369,022
PPP Loan Fee Activity
Unearned fee balance, beginning $ 5,879 $ - $ 4,189 $ -
Unearned fees added 957 9,930 5,062 9,930
Earned fees recognized (2,128) (2,045) (4,543) (2,045)
Unearned fee balance, end $ 4,708 $ 7,885 $ 4,708 $ 7,885
Credit Quality
Credit quality metrics generally improved during the second quarter of 2021 as
classified assets declined by $99 million and the ratio of nonperforming assets
to total assets decreased to 1.09% from 1.15% in the previous quarter. The
improvements in credit metrics were primarily driven by upgrades in COVID-19
impacted segments and the energy portfolio.
The COVID-19 pandemic impacted and may continue to impact our borrowers that may
result in additional charge-offs. However, the Company's key credit metrics
generally improved during the first half of 2021 and are expected to continue to
improve should the overall economy continue its current trajectory.
Performance Measures
As of or For the Quarter Ended As of or For the Period Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Return on average
assets(1) 1.10 % 0.84 % 0.58 % 0.58 % (0.54) % 0.97 % (0.14) %
Return on average
equity(1) 9.86 % 7.80 % 5.19 % 5.19 % (4.84) % 8.84 % (1.15) %
Earnings (loss) per
share $ 0.30 $ 0.23 $ 0.16 $ 0.15 $ (0.14) $ 0.54 $ (0.07)
Diluted earnings (loss)
per share $ 0.30 $ 0.23 $ 0.15 $ 0.15 $ (0.14) $ 0.53 $ (0.07)
Efficiency ratio(2) 53.61 % 50.41 % 53.35 % 53.03 % 70.81 % 52.06 % 63.29 %
Ratio of equity to
assets 12.00 % 10.48 % 11.03 % 11.22 % 11.13 % 12.00 % 11.13 %(1) Interim periods annualized (2) We calculate efficiency ratio as noninterest expense divided by the sum of net interest income and noninterest income.
37
--------------------------------------------------------------------------------Table of Contents Results of Operations Net Interest Income Net interest income, including net interest margin, is presented on a tax-equivalent basis below. A tax-equivalent basis presents all income taxable as if taxable at the same rate. For example,$100 of tax-exempt income would be presented as$126.58 , an amount that, if taxed at the statutory federal income tax rate of 21% would yield$100 . We believe a tax-equivalent basis provides for improved comparability between the various earning assets. For the Quarter Ended For the Six Months Ended June 30, March 31, December 31, September 30, June 30, June 30, June 30, 2021 2021 2020 2020 2020 2021 2020 Yield on securities - tax-equivalent(1) 2.93 % 2.89 % 2.96 % 2.93 % 3.07 % 2.91 % 3.15 % Yield on loans 3.99 3.94 4.00 3.90 4.28 3.96 4.61 Yield on earning assets - tax- equivalent(1) 3.57 3.50 3.71 3.66 3.96 3.53 4.25 Cost of interest-bearing deposits 0.50 0.57 0.69 0.80 0.95 0.53 1.31 Cost of total deposits 0.41 0.48 0.58 0.67 0.79 0.45 1.11 Cost of FHLB and short-term borrowings 1.79 1.79 1.78 1.50 1.35 1.79 1.51 Cost of funds 0.49 0.56 0.65 0.75 0.85 0.52 1.15 Net interest margin - tax-equivalent(1) 3.12 % 3.00 % 3.12 % 2.98 % 3.19 % 3.06 % 3.22 %
(1) Tax-exempt income is calculated on a tax-equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21%.
The following tables present, for the periods indicated, average balance sheet
information, interest income, interest expense and the corresponding average
yield and rates paid:
Three Months Ended
June 30,
2021 2020
Interest Interest
Income / Average Yield Income / Average Yield
Average Balance Expense / Rate(4) Average Balance Expense / Rate(4)
(Dollars in thousands)
Interest-earning assets:
Securities - taxable $ 211,158 $ 1,031 1.96 % $ 290,342 $ 1,626 2.25 %
Securities - tax-exempt(1) 508,483 4,231 3.34 438,525 3,945 3.62
Interest-bearing deposits in other
banks 407,801 110 0.11 186,388 45 0.10
Gross loans, net of unearned
income(2)(3) 4,409,280 43,846 3.99 4,357,055 46,323 4.28
Total interest-earning assets(1) 5,536,722 $ 49,218 3.57 % 5,272,310 $ 51,939 3.96 %
Allowance for loan losses (76,741) (60,889)
Other non-interest-earning assets 213,657 230,092
Total assets $ 5,673,638 $ 5,441,513
Interest-bearing liabilities
Transaction deposits $ 664,552 $ 313 0.19 % $ 413,870 $ 266 0.26 %
Savings and money market deposits 2,385,074 2,107 0.35 1,932,723 2,653 0.55
Time deposits 869,176 2,430 1.12 1,195,445 5,486 1.85
Total interest-bearing deposits 3,918,802 4,850 0.50 3,542,038 8,405 0.95
FHLB and short-term borrowings 287,904 1,282 1.79 496,556 1,668
1.35
Trust preferred securities, net of fair value adjustments 976 24 9.82 933 24 10.61 Non-interest-bearing deposits 801,591 - - 745,864 - - Cost of funds 5,009,273$ 6,156 0.49 % 4,785,391$ 10,097 0.85 % Other liabilities 30,948 44,656 Stockholders' equity 633,417 611,466 Total liabilities and stockholders' equity$ 5,673,638 $ 5,441,513 Net interest income - tax-equivalent(1)$ 43,062 $ 41,842 Net interest spread - tax-equivalent(1) 3.08 % 3.11 % Net interest margin - tax-equivalent(1) 3.12 % 3.19 % (1) Tax exempt income is calculated on a tax equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%. (2) Loans, net of unearned income includes non-accrual loans of$55 million and$38 million as ofJune 30, 2021 and 2020, respectively. (3) Loan interest income includes loan fees of$5 million and$4 million for the three months endedJune 30, 2021 and 2020, respectively. (4) Actual unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts. 38
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Table of Contents
Six Months Ended
June 30,
2021 2020
Interest Interest
Income / Average Yield Income / Average Yield
Average Balance Expense / Rate(4) Average Balance Expense / Rate(4)
(Dollars in thousands)
Interest-earning assets:
Securities - taxable $ 214,178 $ 1,947 1.83 % $ 299,456 $ 3,692 2.48 %
Securities - tax-exempt(1) 494,297 8,286 3.38 444,948 7,952 3.59
Federal funds sold - - - 2,057 18 1.74
Interest-bearing deposits in other
banks 429,930 238 0.11 172,294 518 0.60
Gross loans, net of unearned
income(2)(3) 4,457,792 87,604 3.96 4,132,279 94,662 4.61
Total interest-earning assets(1) 5,596,197 $ 98,075 3.53 % 5,051,034 $ 106,842 4.25 %
Allowance for loan losses (77,552) (59,267)
Other non-interest-earning assets 216,913 218,043
Total assets $ 5,735,558 $ 5,209,810
Interest-bearing liabilities
Transaction deposits $ 690,514 $ 677 0.20 % $ 377,883 $ 1,131 0.60 %
Savings and money market deposits 2,403,318 4,495 0.38 1,909,881 9,388 0.99
Time deposits 920,307 5,406 1.18 1,180,704 12,158 2.07
Total interest-bearing deposits 4,014,139 10,578 0.53 3,468,468 22,677 1.31
FHLB and short-term borrowings 289,039 2,566 1.79 444,141 3,342
1.51
Trust preferred securities, net of fair value adjustments 971 48 9.89 928 58 12.64 Non-interest-bearing deposits 766,725 - - 643,659 - - Cost of funds 5,070,874$ 13,192 0.52 % 4,557,196$ 26,077 1.15 % Other liabilities 35,017 40,406 Stockholders' equity 629,667 612,208 Total liabilities and stockholders' equity$ 5,735,558 $ 5,209,810 Net interest income - tax-equivalent(1)$ 84,883 $ 80,765 Net interest spread - tax-equivalent(1) 3.01 % 3.10 % Net interest margin - tax-equivalent(1) 3.06 % 3.22 % (1) Tax exempt income is calculated on a tax-equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%. (2) Loans, net of unearned income includes non-accrual loans of$55 million and$38 million as ofJune 30, 2021 and 2020, respectively. (3) Loan interest income includes loan fees of$9 million and$6 million for the six months endedJune 30, 2021 and 2020, respectively. (4) Actual unrounded values are used to calculate the reported yield or rate disclosed. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same amounts. 39 -------------------------------------------------------------------------------- Table of Contents Changes in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to: (i) changes in volume (change in volume times old rate); (ii) changes in rates (change in rate times old volume); and (iii) changes in rate/volume (change in rate times the change in volume). Three Months Ended Six Months Ended June 30, 2021 over 2020 June 30, 2021 over 2020 Average Average Volume Yield/Rate Net Change(2) Volume Yield/Rate Net Change(2) (Dollars in thousands) Interest Income Securities - taxable$ (404) $ (191) $ (595)$ (909) $ (836) $ (1,745) Securities - tax-exempt(1) 604 (318) 286 825 (491) 334 Federal funds sold - - - (18) - (18) Interest-bearing deposits in other banks 59 6 65 361 (641) (280) Gross loans, net of unearned income 575 (3,052) (2,477) 7,019 (14,077) (7,058) Total interest income(1) 834 (3,555) (2,721) 7,278 (16,045) (8,767) Interest Expense Transaction deposits 133 (86) 47 579 (1,033) (454) Savings and money market deposits 541 (1,087) (546) 1,968 (6,861) (4,893) Time deposits (1,249) (1,807) (3,056) (2,289) (4,463) (6,752) Total interest-bearing deposits (575) (2,980) (3,555) 258 (12,357)
(12,099)
FHLB and short-term borrowings (831) 445 (386) (1,312) 536
(776)
Trust preferred securities, net of fair value adjustments 1 (1) - 3 (13) (10) Total interest expense (1,405) (2,536) (3,941) (1,051) (11,834) (12,885) Net interest income(1)$ 2,239 $ (1,019) $ 1,220 $ 8,329 $ (4,211) $ 4,118
(1) Tax exempt income is calculated on a tax-equivalent basis. Tax-free municipal securities are exempt from Federal income taxes. The incremental tax rate used is 21.0%. (2) The change in interest not due solely to volume or rate has been allocated in proportion to the respective absolute dollar amounts of the change in volume or rate.
Interest income - Interest income declined for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020. For the three-month period endedJune 30, 2021 compared to the same period in 2020, lower yields on loans were driven by more than$1 billion of loans tied to LIBOR. LIBOR dropped approximately 25 basis points on average between the quarter endedJune 30, 2020 andJune 30, 2021 . In addition, maturities of higher interest rate loans were renewed or replaced at lower rates. For the six-month period endedJune 30, 2021 , lower yields on earning assets were driven by a decline in the interest rate environment. The decline in asset yields was partially offset by year-over-year loan growth and PPP loan income. Interest expense - Interest expense declined for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020. The cost of interest-bearing deposits declined due to strategic rate changes in our deposit products driven by the declining interest rate environment. For the three-month period endedJune 30, 2021 compared to the same period in 2020, the average volume for interest-bearing deposits declined primarily as a result of time deposit maturities and current rates on time deposits. For the six-month period endedJune 30, 2021 compared to the same period in 2020, the decline in interest expense due to changes in rates was partially offset by an increase in average volume due to increased liquidity in the market. Average FHLB and other borrowings declined for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020, as the Company's increase in cash offset the need to renew or increase these borrowings. The increase in the cost of FHLB borrowings was the result of short-term duration borrowings with lower rates that matured in 2020 and were not renewed. Net interest income - Net interest income increased for the three- and six-month periods endedJune 30, 2021 compared to the same period in 2020 driven by rate and volume declines in interest-bearing liabilities and an increase in interest-earning asset volume. 40 -------------------------------------------------------------------------------- Table of Contents Impact of Transition Away from LIBORThe Company had more than$1.4 billion in loans tied to LIBOR atJune 30, 2021 . The Company anticipates that, starting inOctober 2021 , it will no longer add loans using the LIBOR index. For current borrowers, the Company is modifying loan document language to account for the transition away from LIBOR as loans renew or originate. The Company plans to replace LIBOR based loans with the Secured Overnight Financing Rate. The Company adopted Accounting Standards Update ("ASU") 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" in 2020. The ASU allows the Company to recognize the modification related to LIBOR as a continuation of the old contract, rather than a cancellation of the old contract resulting in a write-off of unamortized fees and creation of a new contract. Non-Interest Income For the Quarter Ended For the Six Months Ended June 30, March 31, December 31, September 30, June 30, June 30, June 30, 2021 2021 2020 2020 2020 2021 2020 (Dollars in thousands) Total non-interest income$ 5,825 $ 4,144 $ 2,949 $ 4,063 $ 2,634 $ 9,969 $ 4,729 Non-interest income to average assets(1) 0.41 % 0.29 % 0.21 % 0.29 % 0.19 % 0.35 % 0.18 %
(1) Interim periods annualized.
The components of non-interest income were as follows for the periods shown:
Three Months Ended Six Months Ended
June 30, June 30,
Change Change
2021 2020 $ % 2021 2020 $ %
(Dollars in thousands)Service charges and fees on customer accounts$ 1,177 $ 647 $ 530 82 %$ 2,134 $ 1,155 $ 979 85 % Realized gains (losses) on available-for-sale securities (13) 320 (333) (104) (3) 713 (716) (100) Income from bank-owned life insurance 2,245 453 1,792 396 2,661 909 1,752 193 Swap fees and credit valuation adjustments, net (30) (32) 2 6 125 (41) 166
(405)
ATM and credit card interchange income 1,506 896 610 68 3,834 1,381 2,453 178 Other non-interest income 940 350 590 169 1,218 612 606 99 Total non-interest income$ 5,825 $ 2,634 $ 3,191 121 %$ 9,969 $ 4,729 $ 5,240 111 % The changes in non-interest income were driven by the following: Service charges and fees on customer accounts - This category includes account analysis fees offset by a customer rebate program. The increase for the three- and six-month periods endedJune 30, 2021 compared to the same corresponding periods in 2020 was driven by a decline in costs associated with our rebate program, including a reduction in the funded balance and reduction in rates used. In addition, customer growth and an increase in transactions improved account analysis fees. Realized gains (losses) on available-for-sale securities - The decrease for the three- and six-month periods endedJune 30, 2021 compared to the same corresponding periods in 2020 was primarily due to the value and volume of the Company's securities sold in 2020 in the declining rate environment. The 2020 sales were a strategic decision by management to capitalize on attractive market conditions and improve credit quality. Income from bank-owned life insurance - During the quarter endedJune 30, 2021 , the Company recognized$2 million in tax-free death benefits from a bank-owned life insurance policy compared to$0 of such proceeds for the three- and six-months endedJune 30, 2020 . Swap fee and credit valuation adjustments, net - This category includes swap fees from the execution of new swaps and the credit valuation adjustment ("CVA"). Swap fees on new swaps depend on the size and term of the underlying asset. During the three- and six-month periods endedJune 30, 2021 , no new swaps were executed compared to zero and two new swaps for the three- and six-month 41 -------------------------------------------------------------------------------- Table of Contents periods endedJune 30, 2020 , respectively. The low volume of new swaps was due to management's loan and pricing strategy and lower long-term interest rates. ATM and credit card interchange income - The increase in ATM and credit card interchange income for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020 was primarily the result of customers that mobilized their workforce directly impacted by the COVID-19 pandemic. As anticipated, the Company saw an$822 thousand decline for the three month period endedJune 30, 2021 compared to the prior, three month period endedMarch 31, 2021 as COVID-19 cases declined. The Company anticipates the credit card activity and related income will continue to fluctuate in connection with changes in COVID-19 cases and the related vaccine rollout. Other non-interest income - The increase in other non-interest income for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020 was related to$183 thousand in state employment incentives that we received in the second quarter of 2021. We anticipate a similar benefit in the third quarter of 2021 and will continue to receive the incentive quarterly going forward for three years, but at significantly lower amounts. The Company also saw a$278 thousand and$392 thousand increase in letter of credit and foreign exchange fees for the three- and six-month periods endedJune 30, 2021 compared to the corresponding periods in 2020, respectively. Non-Interest Expense For the Quarter Ended For the Six Months Ended June 30, March 31, December 31, September 30, June 30, June 30, June 30, 2021 2021 2020 2020 2020(1) 2021 2020(1) (Dollars in thousands) Total non-interest expense$ 25,813 $ 22,818 $ 23,732 $ 23,011 $ 31,010 $ 48,631 $ 53,233 Non-interest expense to average assets(2) 1.82 % 1.60 % 1.71 % 1.67 % 2.21 % 1.71 % 2.01 % (1) Total non-interest expense includes$7 million related to goodwill impairment. (2) Interim periods annualized. The components of non-interest expense were as follows for the periods indicated: Three Months Ended Six Months Ended June 30, June 30, Change Change 2021 2020 $ % 2021 2020 $ % (Dollars in thousands)
Salary and employee benefits$ 15,660 $ 14,004 $ 1,656 12 %$ 29,213 $ 28,394 $ 819 3 % Occupancy 2,397 2,045 352 17 4,891 4,130 761 18 Professional fees 1,138 1,295 (157) (12) 1,920 1,966 (46) (2) Deposit insurance premiums 917 1,039 (122) (12) 2,068 2,055 13 1 Data processing 720 721 (1) - 1,436 1,413 23 2 Advertising 435 223 212 95 738 723 15 2 Software and communication 1,034 937 97 10 2,099 1,813 286 16 Foreclosed assets, net 665 1,135 (470) (41) 715 1,154 (439) (38) Goodwill impairment - 7,397 (7,397) (100) - 7,397 (7,397) (100) Other non-interest expense 2,847 2,214 633 29 5,551 4,188 1,363 33 Total non-interest expense$ 25,813 $ 31,010 $ (5,197) (17) %$ 48,631 $ 53,233 $ (4,602) (9) % The changes in noninterest expense were driven by the following: Salary and Employee Benefits - Salary and employee benefit costs increased for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020 primarily due to an increase in anticipated payouts for performance-based awards that resulted from improved earnings and asset quality metrics. In addition, the Company recognized$719 thousand in costs due to the death of an 42 -------------------------------------------------------------------------------- Table of Contents employee during the quarter endedJune 30, 2021 . The costs related to the accelerated vesting of stock-based awards and the annual incentive award held by the employee upon the employee's death. The increase in these costs were offset by reductions in headcount that resulted in a benefit of$564 thousand and$794 thousand for the three- and six-months periods endedJune 30, 2021 compared to the same periods in 2020, respectively. The Company optimized staffing levels during the second half of 2020 and savings began to materialize in 2021. Occupancy - Occupancy costs increased for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020 primarily due to our new locations in the rapidly growingFrisco, Texas market and our more prominent location on theCountry Club Plaza , inKansas City, Missouri . During the quarter endedJune 30, 2021 , the Company entered thePhoenix, Arizona market and entered into a temporary lease agreement that is expected to have an immaterial impact to occupancy costs for the quarter endingSeptember 30, 2021 . Professional Fees - Professional fees declined for the three- and six-month periods endedJune 30, 2021 compared to the same corresponding periods in 2020 primarily from a reduction in legal fees related to PPP loan originations and loan workouts. The decline was partially offset by an increase in consulting fees as a result of our CFO search. Deposit Insurance Premiums - TheFDIC uses a risk-based premium system to calculate quarterly fees. Our costs fluctuate as a result of changes in asset growth, changes in asset quality and changes in capital ratios. Advertising - The increase in advertising costs was driven by increased in-person events for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020 as a result of COVID-19 pandemic restrictions being lifted. Software and Communication - Software and communication costs increased for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020 primarily due to our continued strategy to invest in technologies that allow us to cover beginning-to-end loan originations, provide customers with a suite of online tools and allow us to analyze operational trends. In addition to the growing number of technologies implemented, a portion of costs increased as a result of our growth. Foreclosed Assets, net - The value of a commercial use facility foreclosed upon in 2020 was reduced by$630 thousand during the three-month period endedJune 30, 2021 . The value of industrial facilities and raw land foreclosed upon in 2019 was reduced by$1 million during the three-month period endedJune 30, 2020 . Goodwill Impairment - The Company performed an interim review for goodwill impairment atJune 30, 2020 . A quantitative review was performed on the Tulsa market reporting unit using a combination of income and market based approaches. The reporting unit's fair value was less than its book value and resulted in a$7 million impairment during the three-month period endedJune 30, 2020 . Other Non-interest Expense - Other non-interest expense increased for the three- and six-month periods endedJune 30, 2021 compared to the same periods in 2020 primarily due to a$465 thousand and$1 million increase in commercial card costs, respectively, as a result of our growing customer base and increased use as a result of COVID-19 pandemic restrictions being lifted. In addition, insured cash sweep ("ICS") deposits increased in 2021 from 2020, which drove related fees higher. Income Taxes For the Quarter Ended For the Six Months Ended June 30, March 31, December 31, September 30, June 30, June 30, June 30, 2021 2021 2020 2020 2020 2021 2020 (Dollars in thousands) Income tax expense (benefit)$ 3,263 $ 2,908 $ 1,785 $ 1,498 $ (863) $ 6,171 $
(570)
Income (loss) before income taxes$ 18,840 $ 14,943 $ 9,879 $ 9,504 $ (8,219) $ 33,783 $
(4,069)
Effective tax rate 17 % 19 % 18 % 16 % 10 % 18 %
14 %
Our income tax expense (benefit) differs from the amount that would be
calculated using the federal statutory tax rate, primarily from investments in
tax advantaged assets, including bank-owned life insurance, tax-exempt municipal
securities and tax credit bonds; state tax credits; and permanent tax
differences from goodwill impairment and equity-based compensation. Refer to
"Note 10: Income Tax" within the Notes to the Unaudited Financial Statements for
more information.
43
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Table of Contents
Analysis of Financial Condition
Securities Portfolio
The securities portfolio is maintained to serve as a contingent, on-balance
sheet source of liquidity. The objective of the investment portfolio is to
optimize earnings, manage credit and interest rate risk, ensure adequate
liquidity, and meet pledging and regulatory capital requirements. As of June 30,
2021 , available-for-sale investments totaled $712 million , an increase of $58
million from December 31, 2020 . For additional information, see "Note 3:
Securities" in the Notes to the Unaudited Consolidated Financial Statements.
Loan Portfolio
Refer to "Note 4: Loans and Allowance for Loan Losses ("ALLL")" within the Notes
to the Unaudited Consolidated Financial Statements for additional information
regarding the Company's loan portfolio. As of June 30, 2021 , gross loans
declined $203 million or 5% from December 31, 2020 and was driven by the
following:
PPP - PPP loans decreased $95 million or 33% from December 31, 2020 to June 30,
2021 . PPP loan activity is detailed in the "Second Quarter 2021 Highlights"
section within Management's Discussion and Analysis. The loans are guaranteed by
the SBA, earn interest at 1.00%, and include a fee. The PPP loans will decline
as the SBA forgives the loans and provides repayment to the Bank.
Construction and Land Development - The $60 million or 11% increase was driven
by customer drawdowns on lines of credit primarily for commercial projects.
Energy - Our energy portfolio declined $19 million or 5% from December 31, 2020
to June 30, 2021 primarily due to pay downs on outstanding lines of credit.
Customers remain impacted by lower oil and natural gas prices that strained
operating cash flow and the ability to pay down their lines of credit. The
Company expects the energy portfolio to decline further as part of management's
strategy to lower our oil and natural gas loan concentrations.
Commercial - The $151 million or 11% decline in commercial loans was driven by
$11 million of charge-offs taken, an increase in pay downs and $28 million of
loans sold to a third-party. The loans sold were written down to the sales price
prior to the sale.
The following table shows the contractual maturities of our gross loans and sensitivity to interest rate changes:
As of June 30, 2021
Due after Five Years through
Due in One Year or Less Due after One Year through Five Years Fifteen Years Due after Fifteen Years
Adjustable Adjustable Adjustable
Fixed Rate Rate Fixed Rate Adjustable Rate Fixed Rate Rate Fixed Rate Rate Total
(Dollars in thousands)
Commercial $ 63,384 $ 256,601 $ 278,011 $ 494,569 $ 15,640 $ 79,619 $ - $ - $ 1,187,824
Energy 52 173,019 415 152,987 - - - - 326,473
Commercial real estate 114,143 88,752 365,152 319,828 64,679 249,562 - 6,599 1,208,715
Construction and land
development 7,170 103,053 31,948 418,695 1,839 28,191 7,184 25,477 623,557
Residential and
multifamily real estate 39,413 71,154 60,271 125,429 102,443 8,131 1,373 233,455 641,669
PPP 67,756 - 129,328 - - - - - 197,084
Consumer 20,672 7,313 2,674 12,639 - 21,359 - 2,346 67,003
Gross loans $ 312,590 $ 699,892 $ 867,799 $ 1,524,147 $ 184,601 $ 386,862 $ 8,557 $ 267,877 $ 4,252,325
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Provision and Allowance for Loan Losses ("ALLL")
For the Quarter Ended For the Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
(Dollars in thousands)
Provision for loan losses
$ 34,950 Allowance for loan losses 75,493 74,551 75,295 76,035 71,185 75,493 71,185 Net charge-offs$ 2,558 $ 8,244 $ 11,615 $ 6,025 $ 1,273 $ 10,802 $ 20,661 Refer to "Note 4: Loans and Allowance for Loan Losses ("ALLL")" within the Notes to the Unaudited Consolidated Financial Statements for information regarding the Company's ALLL process. The ALLL atJune 30, 2021 represents our best estimate of the incurred credit losses inherent in the loan portfolio at that date. The allocation in one portfolio segment does not preclude its availability to absorb losses in other segments. The table below presents the allocation of the allowance for loan losses as of the dates indicated: June 30, 2021 December 31, 2020 Percent of Percent of Loan Percent of Percent of Loan Allowance to Total Type to Total Allowance to Total Type to Total Amount Allowance Loans Amount Allowance Loans (Dollars in thousands) Commercial$ 28,433 38 % 28 %$ 24,693 33 % 30 % Energy 17,849 24 8 18,341 24 8 Commercial real estate 19,181 25 28 22,354 29 26 Construction and land development 3,885 5 15 3,612 5 13 Residential and multifamily real estate 5,826 8 15 5,842 8 15 PPP - - 5 - - 7 Consumer 319 - 1 453 1 1 Gross loans$ 75,493 100 % 100 %$ 75,295 100 % 100 % Refer to "Note 4: Loans and Allowance for Loan Losses ("ALLL")" within the Notes to the Unaudited Consolidated Financial Statements for information regarding the activity in the allowance for loan losses. A discussion of the changes in the ALLL is provided below: Charge-offs and Recoveries: During the three months endedJune 30, 2021 , charge-offs primarily related to a commercial borrower. The$3 million charged-off was greater than the reserved balance in the ALLL atDecember 31, 2020 resulting in a$2 million increase in the provision during the three- and six-month periods endedJune 30, 2021 . During the three months endedMarch 31, 2021 , charge-offs primarily related to two commercial borrowers that were unable to support their debt obligations. The$8 million charged-off was greater than the reserved balance in the ALLL atDecember 31, 2020 resulting in a$5 million increase in the provision during the quarter endedMarch 31, 2021 . For the three months endedJune 30, 2020 , the Company charged-off one energy loan that was classified for several years and accounted for the majority of net charge-offs. For the three months endedMarch 31, 2020 , net charge-offs included an$18 million charge-off related to a previously disclosed non-performing, commercial loan. The commercial loan had a specific reserve associated with it as ofDecember 31, 2019 , resulting in a limited impact to the first quarter 2020 provision. In addition, the Company charged off$1 million related to one oil exploration and production credit. 45 -------------------------------------------------------------------------------- Table of Contents The below table provides the ratio of net charge-offs (recoveries) during the period to average loans outstanding based on our loan categories: For the Quarter Ended
For the Six Months Ended
June 30, March 31, December 31, September 30, June 30, June 30, June 30,
2021 2021 2020 2020 2020 2021 2020
Commercial 0.84 % 2.47 % 2.07 % 1.72 % 0.03 % 1.71 % 2.66 %
Energy - - 3.16 - 1.04 - 1.16
Commercial real estate - - 0.53 - - - -
Construction and land
development - - - - - - -
Residential and
multifamily real estate - - (0.02) 0.18 0.15 - 0.08
PPP - - - - - - -
Consumer (0.03) - - (0.09) (0.01) (0.02) 0.46
Total net charge-offs
to average loans 0.23 % 0.74 % 1.03 % 0.54 % 0.12 % 0.49 % 1.01 %Interim periods annualized.
Impact of Risk Rating Changes: Loans risk rated "accruing, substandard" that are not TDRs declined$95 million betweenDecember 31, 2020 andJune 30, 2021 resulting in a$9 million decrease to the required reserve. The decline was driven by approximately$69 million of loans upgraded primarily due to an improving economy and approximately$41 million of loan pay downs, including two commercial loans partially charged-off, discussed above, totaling$28 million that were sold in the first quarter of 2021. The declines were offset by loans that were downgraded to "accruing, substandard" during the six months endedJune 30, 2021 . The commercial loan portfolio had elevated charge-offs over the past five quarters. The charge-offs impacted the commercial loan historical loss factor that resulted in a$3 million increase to the required reserve during the six months endedJune 30, 2021 . Impaired Loans and Other Factors: Impaired loans declined$21 million betweenDecember 31, 2020 andJune 30, 2021 , driven by$15 million of loans upgraded, including an$8 million loan upgraded due to an increase in capital, and a$10 million decline as a result of payments made by several borrowers offset by approximately$4 million of loans impaired during the six months endedJune 30, 2021 . The reduction in impaired loans and related reserve was offset by changes in underlying collateral values that ultimately increased the ALLL by$3 million . Nonperforming Assets and Other Asset Quality Metrics Nonperforming assets include: (i) nonperforming loans - includes non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings ("TDRs") that are not performing in accordance with their modified terms; (ii) foreclosed assets held for sale; (iii) repossessed assets; and (iv) impaired securities. Nonaccrual loans declined$9 million during the quarter endedJune 30, 2021 primarily due to$6 million of loans placed back on accrual status due to payments made or being in the process of collection. In addition, two commercial loans were able to pay down their outstanding balance that decreased the nonaccrual total by$5 million . The reductions were offset by a$3 million commercial loan that matured in the first quarter of 2021 and for which the borrower was unable to make the required payments. Nonaccrual loans declined$12 million during the three months endedMarch 31, 2021 primarily due to one commercial real estate loan borrower that recapitalized its balance sheet and was placed back on accrual. In addition, several commercial borrowers were able to pay down a portion of the outstanding loan balance during the three months endedMarch 31, 2021 . Nonaccrual energy loans increased slightly betweenDecember 31, 2020 andMarch 31, 2021 as oil and natural gas borrowers struggled from the effects of low oil and gas prices over the past year. During 2020, nonaccrual loans increased primarily from energy loans that did not meet the criteria to be modified under the CARES Act and several loans impacted by the COVID-19 pandemic. Foreclosed assets held-for-sale declined$629 thousand during the three-month period endedJune 30, 2021 due to an additional write-down on a commercial property. 46 -------------------------------------------------------------------------------- Table of Contents The table below summarizes our nonperforming assets and related ratios as of the dates indicated: For the Quarter Ended June 30, March 31, December 31, September 30, June 30, 2021 2021 2020 2020 2020 (Dollars in thousands) Nonaccrual loans$ 54,652 $ 63,319 $
75,051
Loans past due 90 days or more and still accruing 1,776 3,183 1,024 4,324 220 Total nonperforming loans 56,428 66,502 76,075 79,884 37,754 Foreclosed assets held for sale 1,718 2,347 2,347 2,349 2,502 Total nonperforming assets$ 58,146 $ 68,849 $ 78,422 $ 82,233 $ 40,256 ALLL to total loans 1.78 % 1.65 % 1.70 % 1.70 % 1.61 % ALLL to nonaccrual loans 138.14 117.74 100.33 100.63 189.66 ALLL to nonperforming loans 133.79 112.10 98.98 95.18 188.55 Nonaccrual loans to total loans 1.29 1.40 1.69 1.68 0.85 Nonperforming loans to total loans 1.33 1.48 1.71 1.78 0.86 Nonperforming assets to total assets 1.09 % 1.15 % 1.39 % 1.49 % 0.74 % Other asset quality metrics management reviews include loans past due 30 - 89 days and classified loans. The Company defines classified loans as loans categorized as substandard - performing, substandard - nonperforming, doubtful, or loss. The definitions of substandard, doubtful and loss are provided in "Note 4 Loans and Allowance for Loan Losses" in the Notes to the Unaudited Consolidated Financial Statements. The following table summarizes our loans past due 30 - 89 days, classified assets and related ratios as of the dates indicated: June 30, March 31, December 31, September 30, June 30, 2021 2021 2020 2020 2020 (Dollars in thousands) Loan Past Due Detail 30 - 59 days past due$ 18,758 $ 10,583 $ 10,137 $ 15,324 $ 14,205 60 - 89 days past due 10 403 7,941 30,027 20,676
Total 30 - 89 days past due
18,078$ 45,351 $ 34,881 Loans 30 - 89 days past due / gross loans 0.44 % 0.24 % 0.41 % 1.01 % 0.79 % Classified Loans Substandard - performing$ 116,078 $ 205,560 $ 211,008 $ 224,352 $ 199,595 Substandard - nonperforming 49,300 57,967 70,734 67,765 29,030 Doubtful 5,352 5,352 4,315 7,794 8,504 Loss - - - - - Total classified loans 170,730 268,879 286,057 299,911 237,129 Foreclosed assets held for sale 1,718 2,347 2,347 2,349 2,502 Total classified assets$ 172,448 $ 271,226 $ 288,404 $ 302,260 $ 239,631 Classified loans / (total capital + ALLL) 24.0 % 38.2 % 40.9 % 43.2 % 34.9 % Classified assets / (total capital + ALLL) 24.2 % 38.6 % 41.2 % 43.6 % 35.3 % The Company's classified assets as ofJune 30, 2021 declined$99 million sinceMarch 31, 2021 . The decline was driven by$18 million in loan payoffs,$56 million in loans upgraded,$35 million in pay downs partially offset by$11 million of new or increased loan balances. The decrease in classified assets was primarily related to commercial, energy and commercial real estate loans that improved due to better economic conditions. The Company's classified assets as ofMarch 31, 2021 decreased$17 million fromDecember 31, 2020 . The decline was driven by$30 million of commercial and commercial real estate loans upgraded due to improvements in the borrowers' capital structure and$8 million in pay downs from classified loans, offset by an increase of approximately$21 million in downgraded loans, primarily from our energy and commercial loan portfolio. 47
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Deposits and Other Borrowings The following table sets forth the maturity of time deposits as ofJune 30, 2021 : As of June 30, 2021 Three Months or Three to Six Six to Twelve After Twelve Less Months Months Months Total (Dollars in thousands) Time deposits in excess of FDIC insurance limit$ 99,085 $ 62,390 $ 78,251 $ 47,480 $ 287,206 Time deposits belowFDIC insurance limit 139,572 126,376 139,175 111,718 516,841 Total$ 238,657 $ 188,766 $ 217,426 $ 159,198 $ 804,047 AtJune 30, 2021 , our deposits totaled$4 billion , a decrease of$338 million or 7% fromDecember 31, 2020 . Of this decrease,$199 million were money market, NOW and savings deposits and$239 million were time deposits. Declines were offset by a$100 million increase in non-interest bearing deposits. The decline in money market, NOW and savings deposits was driven by required payments from our customers to the Internal Revenue Service and interest rate competition. The decrease in time deposits resulted from maturities and the low interest rate environment. Other borrowings include FHLB advances, repurchase agreements and our trust preferred security. AtJune 30, 2021 , other borrowings totaled$284 million , a$12 million or 4% decrease fromDecember 31, 2020 . The decline was driven by borrowings that matured and were not replaced during the six months endedJune 30, 2021 due to increased Company liquidity. As ofJune 30, 2021 , the Company had approximately$333 million of deposits with one customer relationship. The Company evaluated the deposit concentration and determined that a significant reduction to these deposits would not adversely impact the Company as sufficient liquidity is accessible and at favorable rates. As ofJune 30, 2021 , the Company had approximately$2 billion of uninsured deposits, which is an estimated amount based on the same methodologies and assumptions used for the bank's regulatory requirements. The Company believes that its current capital ratios and liquidity are sufficient to mitigate the risks of uninsured deposits.
Liquidity
The Company's liquidity strategy is to maintain adequate, but not excessive,
liquidity to meet the daily cash flow needs of its clients while attempting to
achieve adequate earnings for its stockholders. The liquidity position is
monitored continuously by the Company's finance department. Liquidity resources
can be derived from two sources: (i) on-balance sheet liquidity resources, which
represent funds currently on the balance sheet and (ii) off-balance sheet
liquidity resources, which represent funds available from third-party sources.
Our on-balance sheet and off-balance sheet liquidity resources consisted of the
following as of the dates indicated:
June 30, 2021 December 31, 2020
(Dollars in thousands)
Total on-balance sheet liquidity $ 918,959 Total off-balance sheet liquidity 689,513 756,325 Total liquidity$ 1,608,472 $ 1,802,435 On-balance sheet liquidity as a percent of assets 17 % 19 % Total liquidity as a percent of assets 30 % 32 %
The Company believes that its current liquidity will be sufficient to meet anticipated cash requirements for the next 12 months.
Contractual Obligations In the first quarter of 2021, the Company entered into an agreement with a third-party, venture capital firm. The Company invested$100 thousand during the three months endedJune 30, 2021 and will invest up to$3 million into the venture capital fund. The fund was designed to invest in companies that find solutions for community banks and help accelerate technology adoption for community banks. 48
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Table of Contents Refer to "Note 6: Time Deposits and Borrowings" within the Notes to the Unaudited Consolidated Financial Statements for our significant contractual cash obligations to third parties. In addition, the Company has various lease agreements with approximately$32 million of future minimum lease payments atJune 30, 2021 . Contractual obligations may be satisfied through our on-balance sheet and off-balance sheet liquidity discussed above. Capital Resources and Off-Balance Sheet ArrangementsThe Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The regulatory capital requirements involve quantitative measures of the Company's assets, liabilities, select off-balance sheet items and equity. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Refer to "Note 8: Regulatory Matters" in the Notes to the Unaudited Consolidated Financial Statements for additional information. Management believes that as ofJune 30, 2021 , the Company and the bank met all capital adequacy requirements to which they are subject. The Company is subject to off-balance sheet risk in the normal course of business to meet the needs of its clients that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Refer to "Note 12: Commitments and Credit Risk" in the Notes to Unaudited Consolidated Financial Statements for a breakout of our off-balance sheet arrangements. As ofJune 30, 2021 , the Company believes it has sufficient access to liquid assets to support the funding of these commitments. Critical Accounting Policies and Estimates The Company identified several accounting policies that are critical to an understanding of our financial condition and results of operations. These policies require difficult, subjective or complex judgments and assumptions that create potential sensitivity of our financial statements to those judgments and assumptions. These policies relate to the allowance for loan and lease losses, investment securities impairment, deferred tax assets, and the fair value of financial instruments. A discussion of these policies can be found in the section captioned "Critical Accounting Policies and Estimates" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Form 10-K. There have been no additional changes in the Company's application of critical accounting policies sinceDecember 31, 2020 . Recent Accounting Pronouncements Refer to "Note 1: Nature of Operations and Summary of Significant Accounting Policies" included in the Notes to the Unaudited Consolidated Financial Statements included elsewhere in this Form 10-Q.
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