CrossFirst Bankshares(CFB) - 2020 Q4 - Annual Report

Part I Business CrossFirst Bankshares, Inc. operates as a bank holding company providing financial services across four states, focusing on strategic growth while navigating the COVID-19 pandemic and extensive banking regulations Our Company & 2020 Developments The company pursued organic growth and strategic acquisitions in 2020, navigating the pandemic by originating $369 million in PPP loans and initiating a $20 million stock buyback - The company's strategic plan includes continuing organic growth, pursuing selective acquisitions, improving profitability, attracting talent, maintaining a branch-lite model, and leveraging technology[14] - In response to the COVID-19 pandemic, the company participated in the Paycheck Protection Program (PPP), providing $369 million in loans to support customers[16] - A CEO succession plan was executed, with Michael J. Maddox becoming CEO effective June 1, 2020[17] - Strategic decisions were made to reduce exposure to the energy sector and tribal nation lending, with these portfolios expected to decline in 2021[18] - A $20 million common stock buyback program was announced in Q4 2020, with approximately $6 million (609,613 shares) repurchased by year-end[19] Products, Services, and Competition The Bank provides diverse lending and deposit services to commercial and affluent clients, facing intense competition from various financial institutions - The Bank's primary loan categories are commercial loans, commercial real estate, construction and development, 1-4 family real estate, energy, and consumer loans[22] - Deposit products include personal and business checking/savings accounts, treasury management, money market accounts, and mobile banking[23] - The company competes with a wide range of financial institutions, including commercial banks, credit unions, mortgage companies, and Fintech companies, some of which are not subject to the same level of regulatory supervision[24] Human Capital Resources The company employed 328 full-time staff in 2020, focusing on competitive compensation, diversity, community involvement, and talent development, with 15% of employees promoted - As of year-end 2020, the company employed 328 full-time equivalent staff, with a workforce composition of 58% female and 42% male[25] - The company fosters community involvement through a Volunteer Time Off (VTO) program and a Generous Giving program that matches employee donations up to $500 per year[30][31] - In 2020, over 15% of employees were promoted into roles with increased responsibilities, reflecting a focus on internal talent development supplemented by external hiring[36] Supervision and Regulation The company and its bank subsidiary are extensively regulated by federal and state agencies, adhering to Basel III capital rules, Prompt Corrective Action frameworks, and various consumer protection and AML laws Basel III Minimum Capital Ratios | Capital Ratio | Minimum for Adequacy | Additional Conservation Buffer | Total with 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% | - As of December 31, 2020, both the Company and the Bank's capital ratios exceeded the minimum requirements under the Basel III Capital Rules[47] - To be considered "well-capitalized" under Prompt Corrective Action regulations, a bank must maintain a CET1 ratio of at least 6.5%, a Tier 1 risk-based ratio of at least 8%, a total risk-based ratio of at least 10%, and a leverage ratio of at least 5% As of December 31, 2020, the Bank met these requirements[50] - The Bank's legal lending limit to any single borrower was $156 million as of December 31, 2020, based on Kansas state law which generally limits loans to 25% of the bank's capital[77] Risk Factors The company faces significant business, regulatory, and common stock risks, including COVID-19 impacts, interest rate sensitivity, credit concentrations, cybersecurity threats, and extensive government oversight Risks Relating to Our Business and Market The company's business faces market risks from the COVID-19 pandemic, interest rate sensitivity, credit concentrations in energy and commercial real estate, and operational risks like cybersecurity threats - The COVID-19 pandemic has adversely affected business, financial condition, and results of operations, with ultimate impacts remaining highly uncertain[95] - Profitability is substantially dependent on net interest income and is adversely affected by changes in market interest rates, which can compress margins and increase default risk[109] - The company has significant credit exposure to the energy industry and concentrations in commercial real estate (CRE), which could lead to increased credit stress and potential regulatory restrictions[127][128] - As of December 31, 2020, the 25 largest borrowing relationships totaled approximately $1 billion in commitments, representing 22% of total outstanding commitments, posing a concentration risk[135] - The company faces cybersecurity risks and potential security breaches, which could lead to increased costs, reputational harm, and liability exposure[180] Risks Relating to Our Regulatory Environment Operating in a highly regulated environment, the company faces risks from changing banking laws, stringent capital requirements, increased insurance premiums, and noncompliance with BSA/AML and consumer protection laws - The company is subject to extensive regulation from agencies like the FDIC, OSBCK, and the Federal Reserve, which increases compliance costs and can limit activities[209][210] - Failure to meet minimum capital requirements can trigger mandatory regulatory actions, including restrictions on dividends, growth, and other operations[222] - Noncompliance with the Bank Secrecy Act (BSA) and other anti-money laundering (AML) statutes can result in significant civil money penalties and reputational harm[229][230] - Failure to comply with consumer protection laws, including the Community Reinvestment Act (CRA) and fair lending laws, could lead to sanctions, restrictions on M&A activity, and private litigation[236][237] Risks Related to Our Common Stock Common stock investors face risks from price volatility, anti-takeover provisions, potential dilution from future equity issuances, and dividend limitations due to regulatory restrictions - The market price of the common stock may be volatile due to factors such as variations in operating results, analyst recommendations, and general market conditions[238] - Kansas law, the company's articles of incorporation, and federal regulations on changes of control may have an anti-takeover effect, potentially preventing transactions that could offer a premium to stockholders[239] - The company's ability to pay dividends is not guaranteed and is subject to the Board of Directors' discretion, financial condition, and regulatory policies from the Federal Reserve[244] - As a holding company, its primary source of cash is dividends from the Bank, which are subject to regulatory limitations[246][247] Unresolved Staff Comments The company reports no unresolved staff comments - None[248] Properties The company operates eight banking centers across four states, owning its headquarters and two centers while leasing the others - The company operates eight full-service banking centers in Kansas, Missouri, Oklahoma, and Texas[249] - The headquarters building in Leawood, Kansas, and the banking centers in Wichita, Kansas, and Oklahoma City, Oklahoma are owned by the company, while the other locations are leased[249] Legal Proceedings The company is involved in ordinary course legal proceedings, none of which are expected to have a material adverse effect on its business or financial condition - Management does not expect any current legal proceedings to have a material adverse effect on the company's business, financial condition, or results of operations[250] Mine Safety Disclosures This item is not applicable to the company - Not applicable[252] Information About Our Executive Officers This section lists the company's executive officers as of March 1, 2021, providing their positions and brief professional biographies - Mike Maddox transitioned to the role of President and CEO of the Company on June 1, 2020[253] - George F. Jones, Jr. transitioned from President and CEO to Vice Chairman of the Company on June 1, 2020[255] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "CFB", has not paid dividends, and initiated a $20 million share repurchase program in Q4 2020 - The company's common stock is traded on the Nasdaq Global Select Market under the symbol "CFB"[263] - The company has not declared or paid any cash dividends on its common stock and does not anticipate paying any in the foreseeable future, retaining earnings to support operations and growth[268] Q4 2020 Share Repurchase Summary | Calendar Month | Total Shares Repurchased | Average Price Paid per Share | Approx. Value Remaining ($) | | :--- | :--- | :--- | :--- | | October 1 - 31 | — | — | 20,000,000 | | November 1 - 30 | 243,558 | $9.60 | 17,660,926 | | December 1 - 31 | 366,055 | $10.12 | 13,957,308 | | Total | 609,613 | $9.91 | 13,957,308 | Selected Financial Data This section summarizes five years of financial data, highlighting total asset growth to $5.7 billion in 2020 and a decrease in net income to $12.4 million Selected Financial Data (2018-2020) | (In thousands, except per share data) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net interest income | $160,249 | $141,444 | $110,368 | | Net income | $12,601 | $28,473 | $19,590 | | Net income available to common stockholders | $12,426 | $28,298 | $17,490 | | Total assets | $5,659,303 | $4,931,233 | $4,107,215 | | Diluted earnings per share | $0.24 | $0.58 | $0.47 | Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved significant asset and deposit growth in 2020, navigating the pandemic with PPP loans and modifications, while net income decreased due to a $56.7 million provision for loan losses Overview, Strategy, and Performance The company achieved strong growth from 2016-2020, with assets reaching $5.7 billion and deposits $4.7 billion, driven by organic growth and strategic initiatives Growth History (2016-2020 CAGR) | Metric | 2016-2020 CAGR | 2020 Balance ($ thousands) | 2019 Balance ($ thousands) | | :--- | :--- | :--- | :--- | | Gross loans | 36% | $4,441,897 | $3,852,244 | | Total assets | 28% | $5,659,303 | $4,931,233 | | Total deposits | 29% | $4,694,740 | $3,923,759 | Key Performance Ratios (2020 vs. 2019) | Ratio | 2020 | 2019 | | :--- | :--- | :--- | | Return on average assets | 0.24% | 0.63% | | Return on average equity | 2.05% | 5.38% | | Diluted earnings per share | $0.24 | $0.58 | | Efficiency ratio | 58.13% | 58.37% | - 2020 highlights include total assets reaching $5.7 billion, 15% loan growth, 20% deposit growth, and the issuance of $369 million in PPP loans[285] COVID-19 Pandemic Impact The pandemic significantly impacted 2020 operations, leading to $369 million in PPP loans, $89.8 million in loan modifications, and a $7 million goodwill impairment charge 2020 PPP Loan Summary | Metric | Amount ($ thousands) | | :--- | :--- | | Outstanding Balance (12/31/20) | $292,230 | | Total Origination Fees | $9,946 | | Earned Fees in 2020 | $5,757 | | Unearned Fees (12/31/20) | $4,189 | - As of December 31, 2020, the company had 17 loans with a total value of $89.8 million under COVID-19 related modifications, primarily consisting of payment deferrals and reduced payments[297] - Loan portfolio sectors receiving increased monitoring due to the pandemic include Retail, Hotel & Lodging, and Medical & Senior Living in real estate, and Recreation, Restaurants, and Aviation in commercial loans[301][304] - A goodwill impairment analysis in Q2 2020 resulted in a $7 million impairment charge, representing the total value of goodwill, attributed to the economic impact of the pandemic[305] Results of Operations Net interest income increased to $160.2 million in 2020 despite margin compression, while noninterest income rose 35% and noninterest expense increased 14% due to a goodwill impairment Net Interest Margin Analysis (2019 vs 2020) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Yield on earning assets (tax-equivalent) | 3.96% | 5.04% | | Cost of funds | 0.92% | 1.90% | | Net interest margin (tax-equivalent) | 3.13% | 3.31% | - Net interest income increased by $19.0 million (tax-equivalent) in 2020 compared to 2019 This was driven by a $35.4 million positive impact from volume growth, partially offset by a $16.4 million negative impact from lower rates[315] - Total noninterest income increased by $3.0 million (35%) in 2020, primarily due to higher service charges, ATM/credit card interchange income, and gains on sale of securities[322] - Total noninterest expense increased by $12.3 million (14%) in 2020, driven by a $7.4 million goodwill impairment charge, a $1.5 million increase in deposit insurance premiums, and a $1.3 million rise in professional fees[330] Financial Condition Total assets grew to $5.7 billion in 2020, with gross loans increasing to $4.4 billion and deposits to $4.7 billion, while nonperforming assets rose to $78.4 million - Gross loans grew by $590 million to over $4.4 billion in 2020 Excluding $292 million in PPP loans, the portfolio grew by $301 million or 8%[343][344] Allowance for Loan Losses (ALLL) Activity | (In thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Beginning balance | $56,896 | $37,826 | | Provision for loan losses | $56,700 | $29,900 | | Net charge-offs | ($38,301) | ($10,830) | | Ending balance | $75,295 | $56,896 | Nonperforming Assets (NPA) | (In thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Nonperforming loans | $76,075 | $44,266 | | Foreclosed assets | $2,347 | $3,619 | | Total NPAs | $78,422 | $47,885 | | NPAs to Total Assets | 1.39% | 0.97% | - Total deposits grew by $771 million (20%) in 2020, driven by a $516 million increase in Insured Cash Sweep (ICS) deposits[398] - The company and the Bank remained well-capitalized, with consolidated capital ratios for Total Capital, Tier 1 Capital, and CET1 at 13.1%, 11.8%, and 11.8% respectively, all exceeding regulatory minimums[663] Off-Balance Sheet Arrangements and Contractual Obligations The company utilizes off-balance sheet arrangements, with total commitments reaching $1.57 billion as of December 31, 2020, primarily comprising lines of credit Off-Balance Sheet Commitments | (In thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Commitments to fund commercial loans | $714,315 | $602,456 | | Other loan commitments | $808,319 | $884,069 | | Standby letters of credit | $48,607 | $39,035 | | Total | $1,571,241 | $1,546,495 | Market Risk and Interest Rate Sensitivity The company manages interest rate risk through various analyses, with simulations indicating potential initial net interest income decrease in a +100 basis point rate shock but increases in higher rate scenarios - The company manages interest rate risk using a combination of gap reports, earnings simulations, and Economic Value of Equity (EVE) analysis[438] Interest Rate Shock Simulation (as of Dec 31, 2020) | Change in Interest Rate (bps) | % Change in Net Interest Income (12-month) | % Change in Fair Value of Equity | | :--- | :--- | :--- | | +300 | 1.2% | (10.3)% | | +200 | 0.4% | (6.2)% | | +100 | (0.3)% | (2.8)% | | -100 | NA | NA | Selected Quarterly Financial Data This section presents unaudited quarterly financial data, showing $8.1 million net income for Q4 2020, an improvement from a $0.7 million net loss in Q4 2019 Q4 2020 vs Q4 2019 Performance | (In thousands) | Q4 2020 | Q4 2019 | | :--- | :--- | :--- | | Net Interest Income | $41,537 | $37,179 | | Provision for loan losses | $10,875 | $19,350 | | Net income (loss) | $8,094 | ($700) | Critical Accounting Policies and Estimates The company's critical accounting policies involve significant management judgment for the Allowance for Loan Losses, Deferred Tax Assets, and Fair Value of Financial Instruments - The determination of the Allowance for Loan Losses (ALLL) is a critical accounting estimate that requires management to make assumptions and judgments regarding future uncollectible amounts in the loan portfolio[470] - The valuation of the Deferred Tax Asset involves significant judgment in evaluating the amount and timing of recognition, and any reduction in estimated future taxable income could require a valuation allowance[472] - Determining the fair value of financial instruments, especially when observable market prices are not available (Level 3), requires management judgment and is dependent on assumptions about discount rates and future cash flows[472] Quantitative and Qualitative Disclosures about Market Risk This section incorporates market risk disclosures by reference from the "Interest Rate Sensitivity" section within Item 7 - The information required for this item is incorporated by reference from the "Interest Rate Sensitivity" section in the MD&A[476] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the three years ended December 31, 2020, including balance sheets, income statements, and comprehensive notes Consolidated Financial Statements The audited consolidated financial statements for 2020 show total assets of $5.66 billion, total liabilities of $5.03 billion, and net income of $12.6 million Consolidated Balance Sheet Highlights (as of Dec 31) | (In thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $5,659,303 | $4,931,233 | | Loans, net of allowance | $4,366,602 | $3,795,348 | | Total Deposits | $4,694,740 | $3,923,759 | | Total Liabilities | $5,034,875 | $4,329,589 | | Total Stockholders' Equity | $624,428 | $601,644 | Consolidated Income Statement Highlights (Year Ended Dec 31) | (In thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Interest Income | $160,249 | $141,444 | $110,368 | | Provision for Loan Losses | $56,700 | $29,900 | $13,500 | | Net Income | $12,601 | $28,473 | $19,590 | Notes to Consolidated Financial Statements The notes detail accounting policies, loan portfolio, goodwill impairment, regulatory capital, stock-based compensation, fair value measurements, and COVID-19 impacts - The company's operating segments are aggregated into one reportable segment as operations are managed and financial performance is evaluated on a company-wide basis[505] - A goodwill impairment test as of June 30, 2020, resulted in a full impairment charge of $7 million, primarily due to economic conditions from the COVID-19 pandemic and oil market volatility[628] - The company is a member of the CDARS network, which allows depositors to receive FDIC insurance on amounts greater than the standard limit CDARS deposits totaled approximately $75 million as of December 31, 2020[643] - The company redeemed all of its $30 million Series A Preferred Stock on January 30, 2019[728] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[736] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes in Q4 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[736] - Based on an assessment using the COSO 2013 framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2020[740] Other Information The company reports no other information for this item - None[742] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 proxy statement - Required information for this item is incorporated by reference from the registrant's definitive proxy statement for its 2021 annual meeting of stockholders[743] Executive Compensation Information on executive and director compensation is incorporated by reference from the 2021 proxy statement and Note 16 - Required information for this item is incorporated by reference from the registrant's definitive proxy statement for its 2021 annual meeting of stockholders[744] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, with 1,703,175 securities issuable under equity plans at a $10.35 weighted-average exercise price Securities Authorized for Issuance under Equity Compensation Plans (as of Dec 31, 2020) | Plan Category | Securities to be Issued Upon Exercise (A) | Weighted-Average Exercise Price (B) | Securities Remaining for Future Issuance (C) | | :--- | :--- | :--- | :--- | | Equity compensation plans not approved by shareholders | 1,703,175 | $10.35 | 2,202,166 | Certain Relationships and Related Transactions and Director Independence Information on related person transactions and director independence is incorporated by reference from the 2021 proxy statement - Required information for this item is incorporated by reference from the registrant's definitive proxy statement for its 2021 annual meeting of stockholders[747] Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2021 proxy statement - Required information for this item is incorporated by reference from the registrant's definitive proxy statement for its 2021 annual meeting of stockholders[748] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including those incorporated by reference - This section provides a list of all financial statements and exhibits filed with the Form 10-K, including those incorporated by reference[749][752] Form 10-K Summary This item is not applicable - Not applicable[755]