CrossFirst Bankshares(CFB) - 2019 Q4 - Annual Report

Part I Business CrossFirst Bankshares, Inc. is a regional bank providing comprehensive financial services to businesses and professionals, operating under a branch-lite model - The company operates as a regional bank focusing on small and middle-market commercial businesses and affluent consumers, a segment it believes is underserved by larger competitors[28] Five-Year Growth of Key Business Areas (2015-2019) | | Compound Annual Growth Rate | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | | | (Dollars in thousands) | | | | | | Available-for-sale securities | 13% | $741,634 | $663,678 | $703,581 | $593,012 | $460,542 | | Gross loans (net of unearned income) | 40% | $3,852,244 | $3,060,747 | $1,996,029 | $1,296,886 | $992,726 | | Total assets | 33% | $4,931,233 | $4,107,215 | $2,961,118 | $2,133,106 | $1,574,346 | | Noninterest-bearing deposits | 43% | $521,826 | $484,284 | $290,906 | $198,088 | $123,430 | | Total deposits | 32% | $3,923,759 | $3,208,097 | $2,303,364 | $1,694,301 | $1,294,812 | - The company's strategic plan focuses on continued organic growth, selective acquisitions, improving profitability, attracting talent, maintaining a branch-lite model, and leveraging technology[25][311] - As of December 31, 2019, the Bank met the requirements to be deemed "well-capitalized" under the prompt corrective action regulations[51] Basel III Minimum Capital Ratios (2019) | | Basel III Minimum For Capital Adequacy Purposes | Basel III Additional Capital Conservation Buffer | Basel III Ratio With Capital Conservation Buffer | | :--- | :--- | :--- | :--- | | Total risk based capital | 8.00% | 2.50% | 10.50% | | Tier 1 risk based capital | 6.00% | 2.50% | 8.50% | | Common equity tier 1 risk based capital | 4.50% | 2.50% | 7.00% | | Tier 1 leverage ratio | 4.00% | —% | 4.00% | Risk Factors The company faces significant business, market, regulatory, and common stock risks, including economic sensitivity, credit concentrations, and cybersecurity threats - The business is exposed to credit risk from the energy industry, both through direct energy loans and indirect effects on non-energy clients dependent on the sector[122] - A significant portion of the loan portfolio is concentrated in commercial real estate (CRE), which could subject the company to greater supervisory scrutiny and potential growth restrictions under the CRE Concentration Guidance[124] - The company's 25 largest borrowing relationships totaled approximately $1 billion in commitments, representing 26% of total outstanding commitments as of December 31, 2019, indicating a concentration risk[130] - The transition away from LIBOR presents a risk, as $1 billion of the company's loans were tied to LIBOR at year-end 2019, potentially incurring additional expenses and facing potential litigation during the transition to alternative reference rates[119] - The company is subject to the Federal Reserve's "source of strength doctrine", which may require it to provide capital injections to its subsidiary bank, potentially to the detriment of the holding company and its stockholders[217] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[261] Properties The company owns its Leawood, Kansas headquarters and two banking centers, while leasing its other full-service locations across four states - The company owns its headquarters in Leawood, KS, and two other banking centers, while leasing the remainder of its locations[262] Legal Proceedings The company is involved in ordinary course legal proceedings, which management does not expect to have a material adverse effect - Management does not expect current legal proceedings to have a material adverse effect on the company[263] Mine Safety Disclosures This item is not applicable to the company - Not applicable[265] Information About Our Executive Officers This section provides biographical information for the company's executive officers, detailing their age, position, and business experience Executive Officers as of March 1, 2020 | Name | Age | Position(s) | | :--- | :--- | :--- | | George F. Jones, Jr. | 75 | President and Chief Executive Officer of the Company | | David O'Toole | 69 | Chief Financial Officer and Chief Investment Officer of the Company and Chief Financial Officer of the Bank | | Mike Maddox | 50 | President and Chief Executive Officer of the Bank | | W. Randall Rapp | 55 | Chief Credit Officer of the Bank | | Amy Fauss | 52 | Chief Operating Officer of the Bank | | Tom Robinson | 61 | Chief Risk Officer of the Company | | Aisha Reynolds | 43 | General Counsel and Corporate Secretary of the Company and the Bank | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock began trading on Nasdaq after its August 2019 IPO, raising $87 million, and has since underperformed market indices with no dividends anticipated - The company completed its IPO on August 14, 2019, selling 6,594,362 shares at $14.50 per share[279] Stock Performance Since IPO (August 15, 2019 - December 31, 2019) | | August 15, 2019 | December 31, 2019 | | :--- | :--- | :--- | | CrossFirst Bankshares, Inc. | $100.00 | $99.45 | | Russell 2000 Index | $100.00 | $114.85 | | KBW Nasdaq Regional Banking Index | $100.00 | $116.94 | | SNL U.S. Bank $5 billion to $10 billion Index | $100.00 | $118.57 | - The company has not declared or paid any cash dividends on its common stock and does not anticipate paying any in the foreseeable future, intending to retain earnings to support operations and growth[284] Selected Financial Data This section provides a five-year summary of key financial data (2015-2019), highlighting strong growth in assets, loans, and net income, along with performance and capital ratios Selected Financial Data (2015-2019) | (Dollars in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net interest income | $141,444 | $110,368 | $74,818 | $54,053 | $42,267 | | Net income | $28,473 | $19,590 | $5,849 | $10,311 | $7,469 | | Total assets | $4,931,233 | $4,107,215 | $2,961,118 | $2,133,106 | $1,574,346 | | Gross loans | $3,852,244 | $3,060,747 | $1,996,029 | $1,296,886 | $992,726 | | Total deposits | $3,923,759 | $3,208,097 | $2,303,364 | $1,694,301 | $1,294,812 | | Total stockholders' equity | $601,644 | $490,336 | $287,147 | $214,837 | $160,004 | | Diluted earnings per share | $0.58 | $0.47 | $0.12 | $0.39 | $0.28 | | Book value per share | $11.58 | $10.21 | $8.38 | $7.34 | $6.61 | Selected Ratios (2015-2019) | Selected Ratios | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Return on average assets | 0.63% | 0.56% | 0.24% | 0.56% | 0.53% | | Return on average common equity | 5.38% | 5.34% | 1.53% | 5.51% | 4.60% | | Net interest margin - tax equivalent | 3.31% | 3.39% | 3.40% | 3.24% | 3.27% | | Efficiency ratio | 58.37% | 73.64% | 79.10% | 70.64% | 68.48% | | Nonperforming assets to total assets | 0.97% | 0.43% | 0.18% | 0.20% | 0.08% | | Total risk-based capital ratio | 13.43% | 13.51% | 10.65% | 12.51% | 11.82% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides a detailed analysis of 2019 financial performance, highlighting significant asset and loan growth, increased net income, and a rise in loan loss provisions due to credit quality changes 2019 Highlights The company achieved significant asset and loan growth in 2019, alongside a substantial increase in net income, though credit quality metrics deteriorated - Total assets grew by $824 million (20%) to nearly $5 billion, and gross loans increased by $791 million (26%) to almost $4 billion in 2019[314] - Net income for 2019 was $28.5 million, a 45% increase from $19.6 million in 2018, resulting in diluted EPS of $0.58[316][317] - Credit quality metrics showed some deterioration, with nonperforming assets to total assets increasing to 0.97% from 0.43% in 2018, primarily driven by one nonperforming commercial credit relationship[319] - Net charge-offs increased significantly to $11 million in 2019, compared to $2 million in 2018, driven by two commercial loans and one energy loan[321] Net Interest Income The company experienced increased net interest income due to asset growth, but net interest margin declined as loan repricing outpaced funding cost changes - For the year ended December 31, 2019, tax-equivalent net interest income increased by $30 million (27%) to $144 million, primarily due to asset growth, but the net interest margin declined by 8 basis points to 3.31% as loans repriced downward more quickly than funding costs in a declining rate environment[325] - Interest expense rose 61% in 2019, driven by a $763 million increase in interest-bearing deposits to support asset growth and a 50 basis point increase in the cost of these deposits due to market competition[327] - The company has $1 billion in loans tied to LIBOR as of December 31, 2019, and has established an internal committee to manage the transition away from LIBOR, which is expected to cease after 2021[332] Provision for Loan Losses The provision for loan losses significantly increased in 2019 due to strong loan growth and the deterioration of a single large commercial credit - The provision for loan losses increased by $16 million (121%) in 2019 compared to 2018, driven by strong loan growth, the deterioration of a single large credit relationship, and a general rise in nonperforming assets[339] Noninterest Income Noninterest income saw growth, primarily driven by a significant increase in swap fee income and other fee-based activities Components of Noninterest Income (2017-2019) | (Dollars in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Service charges and fees | $604 | $444 | $1,201 | | Gain on sale of securities | $987 | $538 | $406 | | Impairment of premises held for sale | ($424) | ($171) | ($1,903) | | Gain on sale of loans | $207 | $827 | $827 | | Income from BOLI | $1,878 | $1,969 | $1,452 | | Swap fee income, net | $2,753 | $285 | — | | ATM and credit card interchange income | $1,785 | $1,224 | $706 | | Other noninterest income | $925 | $967 | $990 | | Total noninterest income | $8,715 | $6,083 | $3,679 | - Swap fee income was a major driver of noninterest income growth, increasing to $2.75 million in 2019 from $285 thousand in 2018, due to adding nineteen new back-to-back swap agreements with $347 million in loan commitments and a favorable change in valuation methodology[349][350] Noninterest Expense Total noninterest expense increased slightly in 2019, primarily due to higher salary and employee benefits from strategic hiring Components of Noninterest Expense (2017-2019) | (Dollars in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Salary and employee benefits | $57,114 | $56,118 | $39,461 | | Occupancy | $8,349 | $8,214 | $5,803 | | Professional fees | $2,964 | $3,320 | $3,060 | | Deposit insurance premiums | $2,787 | $3,186 | $1,575 | | Data processing | $2,544 | $1,995 | $1,441 | | Other noninterest expense | $11,930 | $12,922 | $10,748 | | Total noninterest expense | $87,648 | $85,755 | $62,089 | - Total noninterest expense increased by 2% in 2019, and excluding a one-time $5 million management restructuring charge in 2018, salary and benefits expense increased by $6 million (12%) in 2019 due to strategic hiring to support growth[365] - Salary and employee benefits constituted 65% of total noninterest expense in 2019[359] Loan Portfolio The loan portfolio experienced significant growth across various categories in 2019, particularly in commercial, real estate, and construction loans - Gross loans grew by $791 million (26%) to nearly $4 billion as of December 31, 2019, driven by growth across commercial loans (+$222M), commercial real estate (+$177M), construction and land development (+$188M), and residential real estate (+$152M)[380] Loan Portfolio Composition as of December 31, 2019 | Loan Category | Amount (in thousands) | % of Loans | | :--- | :--- | :--- | | Commercial and industrial | $1,356,817 | 35% | | Energy | $408,573 | 11% | | Commercial real estate | $1,024,041 | 27% | | Construction and land development | $628,418 | 16% | | Residential real estate | $398,695 | 10% | | Consumer | $45,163 | 1% | | Gross loans (net of unearned income) | $3,852,244 | 100% | Allowance for Loan Losses The allowance for loan losses significantly increased in 2019 due to higher reserves for impaired loans and overall loan growth, alongside a rise in net charge-offs - The allowance for loan losses (ALLL) increased by $19 million (50%) to $57 million at year-end 2019, primarily due to a $13 million reserve for impaired loans, largely from one deteriorating commercial loan relationship, and a $9 million increase related to overall loan growth[394] - The ALLL as a percentage of total loans increased to 1.48% at December 31, 2019, from 1.23% at the end of 2018[395] - Net charge-offs for 2019 totaled $11 million, a significant increase from $2 million in 2018, with two commercial loans accounting for $8 million of the 2019 charge-offs[396] Nonperforming Assets Nonperforming assets significantly increased in 2019, primarily driven by a single large commercial loan relationship that defaulted Nonperforming Assets (2017-2019) | (Dollars in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Nonaccrual loans | $39,675 | $17,818 | $5,417 | | Loans past due 90+ days and still accruing | $4,591 | — | — | | Total nonperforming loans | $44,266 | $17,818 | $5,417 | | Foreclosed assets held-for-sale | $3,619 | — | — | | Total nonperforming assets | $47,885 | $17,818 | $5,417 | - Nonperforming assets increased by $30 million (169%) in 2019, primarily due to a single commercial loan relationship with a $30 million balance that was restructured as a TDR and subsequently defaulted[410] - The ratio of nonperforming assets to total assets rose to 0.97% at year-end 2019, compared to 0.43% at year-end 2018[414] Capital Requirements Both the company and its bank subsidiary exceeded all Basel III minimum regulatory capital requirements, including the conservation buffer, as of year-end 2019 - The company and the Bank are subject to Basel III capital rules, and as of December 31, 2019, both exceeded all minimum regulatory capital requirements, including the fully phased-in capital conservation buffer[462][470] Company Capital Ratios as of December 31, 2019 | Ratio | Actual | Minimum Required (with buffer) | | :--- | :--- | :--- | | Total capital to risk-weighted assets | 13.43% | 10.50% | | Tier 1 capital to risk-weighted assets | 12.22% | 8.50% | | CET1 to risk-weighted assets | 12.20% | 7.00% | | Tier 1 leverage ratio | 12.06% | 4.00% | - As of December 31, 2019, the FDIC categorized the Bank as "well-capitalized" under the prompt corrective action framework[469] Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk using gap reports, earnings simulations, and EVE analysis, with simulations indicating sensitivity of net interest income to rate changes - The company's interest rate risk position is managed by the Funds Management Committee using gap reports, earnings simulation, and Economic Value of Equity (EVE) models[489] Interest Rate Shock Simulation Results (as of Dec 31, 2019) | Change in Interest Rate (Basis Points) | Percent Change in Net Interest Income (12-month horizon) | | :--- | :--- | | +300 | 7.7% | | +200 | 5.6% | | +100 | 3.0% | | Base | — | | -100 | (3.6)% | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2017-2019, including the unqualified opinion from BKD, LLP, and detailed notes on accounting policies Report of Independent Registered Public Accounting Firm The independent auditor, BKD, LLP, issued an unqualified opinion on the company's consolidated financial statements - The independent auditor, BKD, LLP, issued an unqualified opinion, stating that the consolidated financial statements present fairly, in all material respects, the financial position of the company in conformity with U.S. GAAP[567] Consolidated Financial Statements This section provides the company's core consolidated financial statements, including balance sheets and income statements, for the specified fiscal years Consolidated Balance Sheet Highlights (as of Dec 31) | (Dollars in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total Assets | $4,931,233 | $4,107,215 | | Cash and cash equivalents | $187,320 | $216,541 | | Loans, net of allowance | $3,795,348 | $3,022,921 | | Total Liabilities | $4,329,589 | $3,616,879 | | Total deposits | $3,923,759 | $3,208,097 | | Total Stockholders' Equity | $601,644 | $490,336 | Consolidated Income Statement Highlights (Year Ended Dec 31) | (Dollars in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Interest Income | $141,444 | $110,368 | $74,818 | | Provision for Loan Losses | $29,900 | $13,500 | $12,000 | | Noninterest Income | $8,715 | $6,083 | $3,679 | | Noninterest Expense | $87,648 | $85,755 | $62,089 | | Net Income | $28,473 | $19,590 | $5,849 | Notes to Consolidated Financial Statements These notes provide detailed explanations of the company's accounting policies, financial figures, and significant events, including its IPO - The company aggregates its operating markets (Kansas, Missouri, Oklahoma, Texas) into one reportable segment as they share similar economic characteristics, products, and regulatory environments, and are managed on a company-wide basis[595] - In 2019, the company completed its IPO, issuing 6,594,362 common shares (including the overallotment option) at $14.50 per share, receiving net proceeds of $87 million[865] - The company redeemed all 1,200,000 outstanding shares of its Series A Preferred Stock on January 30, 2019, for approximately $30 million[869] - As an Emerging Growth Company (EGC), the company has elected to use the extended transition period for complying with new or revised accounting standards, allowing it to follow private company adoption timelines[641] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[895] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of December 31, 2019, with no material changes during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[896] - A management report on internal control over financial reporting is not included due to the transition period for newly public companies[897] Other Information The company reports no other information for this item - None[898] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2020 proxy statement - Information regarding directors and corporate governance is incorporated by reference from the 2020 proxy statement[900] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2020 proxy statement - Information regarding executive compensation is incorporated by reference from the 2020 proxy statement[901] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates information on security ownership from the 2020 proxy statement, excluding the provided equity compensation plan table Securities Authorized for Issuance under Equity Compensation Plans (as of Dec 31, 2019) | Plan Category | Number of securities to be issued upon exercise | Weighted average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans not approved by shareholders | 1,866,152 | $9.99 | 2,414,669 | | Total | 1,866,152 | $9.99 | 2,414,669 | Certain Relationships and Related Transactions, and Director Independence Information on related person transactions and director independence is incorporated by reference from the company's 2020 proxy statement - Information regarding related party transactions and director independence is incorporated by reference from the 2020 proxy statement[905] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's 2020 proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the 2020 proxy statement[907] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements filed under Item 8 and provides a detailed index of all exhibits filed with the Form 10-K - This item lists the financial statements filed under Item 8 and provides an index of all exhibits filed with the Form 10-K[908][909] Form 10-K Summary This item is not applicable to the company - Not applicable[913]