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spk01: Hello, welcome to the third quarter 2021 earnings conference call for CrossFirst Bank Shares. All participants will be in listen-only mode during the presentation. Please note, this event is being recorded. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. I would now like to turn the call over to Heather Worley, Director of Investor Relations. Please go ahead.
spk03: Good morning, and thank you for joining us today for the Cross First Bank Shares third quarter 2021 earnings conference call. I'm Heather Worley, Director of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on our current expectations of future results or events. Forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K, and in subsequent filings with the SEC. Our speakers for the call today are Mike Maddox, President and CEO, Ben Klaus, CFO, and Randy Rapp, Chief Risk and Chief Credit Officer. At the conclusion of our prepared remarks, our operator, Sonny, will facilitate a question and answer session. At this time, I'd like to turn the call over to Mike Maddox.
spk09: Thank you for the introduction, Heather, and welcome to the team. We're excited to have you here with us. Good morning, and thank you for joining us today. We've had another great quarter with $21 million of earnings. Our results this quarter included the release of $10 million of reserves from continued significant improvement in credit quality, partially offset by an asset impairment, both of which Ben and Randy will talk through in more detail. Based on our continued strong core earnings and the sustained credit improvement, our Board approved a new share buyback authorization of up to $30 million. This allows us to deploy accumulated capital while also enhancing our earnings per share and our return on equity without any significant execution risk. Before we get into more details about the third quarter results, I would like to take a moment to highlight a few strategic differentiators about our company as well as the progress we have made in several key areas. As many of you know, Cross First Bank was founded as a private company in 2007 and became a publicly traded company in August of 2019. The company has grown substantially over the past 14 years to become a $5-plus billion bank. The blueprint for our success is built on our vision to be the most trusted bank in each of our markets by staying true to our core values, character, confidence, commitment, and connections. We differentiate ourselves from our competitors by remaining steadfast to those values as one team, one bank, with a shared vision to provide extraordinary service to our clients. These core values have been paramount to our achievements. We made it through the challenges of the pandemic by reinforcing our commitment to our employees, shareholders, and the communities we serve. Again, I want to thank all of our employees for their extraordinary efforts during these challenging times. To illustrate our efforts, I am pleased to announce the publication of our first annual Cross First Impact Report. This report highlights the meaningful difference the company is making in the lives of our clients, shareholders, and employees in the communities where we work and live. It also serves as a roadmap for where we want to go as a company as we continue to deliver on our extraordinary service promise. Our strategic plan and objectives for 2022 and beyond include these tenets of continued growth through attracting and retaining the best talent, leveraging our strong capital position, and continuing to serve our clients and communities. I am confident in our ability to execute because of our people, our strong history of organic growth, the attractive markets in which we operate, and our culture of success. We were recently recognized by the Kansas City Business Journal as one of the best places to work out of hundreds of nominees. This is a true reflection of our highly engaged team who are committed to our company's vision, purpose, and promise. We recently completed our annual employee engagement survey with record results. Over 94% of our team members responded to the survey, and the number of our engaged employees increased by nearly 20%. This metric demonstrates that we have a highly engaged team committed to serving our clients and executing on our plan. Talent acquisition remains a key component of our strategic plan. We believe the differentiated culture we offer provides us a platform to attract top talent in our markets that will drive our future growth. Most recently, this strategy included the hiring of our new Chief Technology Officer, our new chief financial officer, and other additional key leadership positions. We remain optimistic about our recent expansion efforts into Frisco, Texas, and Phoenix, Arizona. We have been successful in adding talent in Phoenix as we recently have hired four strong, experienced producers. We are pleased with the activity the team has already generated and the pipeline they are building. Investing in the right technology for our clients and organization is a top priority for CrossFirst. Our efforts to enhance our digital presence that drive future growth progress this quarter. We are dedicated to enhancing both client-facing and internal digital platforms to drive automation, strengthen our processes, and improve efficiency. These investments in our technology capabilities will expand our digital banking features and functionality to better serve our clients. We continue to evaluate potential partnerships to further our technology suite of products and digital offerings to our clients. The economy continues to improve, and the recent Beige Book report from the Federal Reserve noted moderate to strong economic growth in the markets we serve with labor shortages remaining to be the primary obstacle to increased activity or expansion plans. While companies are hopeful that the expiration of the federal supplemental unemployment benefits will provide some relief, many have increased their investments in labor-saving automation strategies in response to this issue. The Kansas City and Dallas Fed reports both show moderate and robust growth in manufacturing. we are monitoring labor shortages and supply chain challenges. Their survey indicated that capital expenditure levels would be similar to last year or higher than pre-pandemic levels, which should provide future growth opportunities in the markets we serve. Real estate in the high-growth Arizona and Texas markets, particularly in construction, remains exceptionally strong, despite large construction backlogs due to labor and supply shortages. which are limiting sales and escalating costs. We continue to see strong demand and opportunities in multifamily and in the industrial development space. Overall, loan pricing remains competitive for high-quality credits. This is likely a result of the amount of liquidity in the market. We are firmly committed to growth without compromising our credit standards, and we continue to expect credit improvement across all of our markets. We are well capitalized, and I am excited for the future as we look to grow organically in our existing markets, hire experienced bankers in key growth markets, and add new business lines and products. We are confident in our ability to win on talent, which will drive our growth trajectory. And now I'll hand the call over to our CFO, Ben Klaus, who will start on slide eight. Ben?
spk02: Thanks, Mike, and good morning, everyone. We had another solid quarter and continued to generate a consistent level of earnings at $21 million, which equates to 41 cents diluted earnings per share for the quarter. In addition to strong underlying performance, our results this quarter included a release of $10 million in reserves as credit metrics continue to improve, as well as an asset impairment of $6.2 million related to a previously restructured loan. I am very pleased that we completed our fifth straight quarter of earnings growth and are gaining some consistency in our ability to generate a better level of net income and add to our strong capital base. Our earnings generation will be an important part of providing the capital we need to support higher levels of assets in the future. Going forward, we will be particularly focused on deploying that capital for continued growth balanced with strategic return of that capital to our shareholders. Quarterly return on average assets continues to improve, climbing to 1.54%, and return on average equity increased to 12.92%. Of course, both are up due to the net positive impact of the release of reserves less the asset impairment, but both increased absent these impacts. We are excited to see these return rates continue to improve as a result of our earnings momentum and our strategy execution. We generated loan growth of over 2% this quarter, excluding the PPP forgiveness, marking a change in our trajectory as these loans continue to be forgiven and as we see the beginnings of some return to more normalized loan demand. Our interest income in the third quarter was $47.3 million, which declined slightly due to a reduction in average loan balances of about 4%, with the vast majority of that average decline coming specifically from the PPP loan forgiveness. The yield was up due to that forgiveness, despite the fee recognition for those loans. Our remaining PPP loan balance was $109 million at the end of the quarter, with $3 million in unearned fees yet to be recognized, which we expect to be spread over a few more quarters. We were very pleased to have driven demand deposit growth this quarter, ending the period with 22% of deposits in non-interest-bearing accounts. interest expense declined sequentially by over 10% to $5.5 million due to mixed shift changes toward demand deposits and lower yield products, CDs repricing lower, and modest rate reductions. We continue to focus on preserving our margin this quarter in a highly competitive loan growth environment by also reducing non-core funding. Because of our current balance sheet structure, Our loan-to-deposit ratio remained high for the quarter at 95%. Historically, we have used wholesale and institutional funding to help support our growth initiatives, which has allowed us to be more nimble with our excess liquidity in the current environment. These funding sources remain available to us as demand in loan growth returns. Net interest margin increased to 3.20% on a fully taxable basis compared to 3.12% in the previous quarter. This was due to a decline in cash balances as well as the PPP forgiveness and lower cost of deposits. Adjusted non-interest income was $5.1 million, excluding the $6.2 million asset impairment from this quarter, which was a 28% increase from the previous quarter's adjusted $4 million net of the BOLI gain. This improvement was primarily driven by some realized gains on bond sales, and we had an increase in credit card fees compared to the second quarter. Credit card income growth remains a promising line of business for us as we continue to gain traction there. Our investment portfolio remains a great source of revenue for the company, and approximately $44 million of tax-free securities were purchased this quarter to reinvest the cash flows from the portfolio and to replace the securities sold. Non-interest expenses for the quarter were $24.0 million, $1 million lower than second quarter, after adjusting for the unusual compensation costs last quarter. the swing was primarily due to a foreclosed asset charge-off last quarter and a few small recoveries this quarter. We continue to see some operating expenses normalizing from the lower levels incurred during the pandemic as business development activities return. While our gap efficiency ratio was 59% for the quarter, it would have been 50% without the asset impairment improving from last quarter's 53%. This is the continuation of a multi-year trend in efficiency ratio improvement and an overall focus on managing expenses prudently while still supporting growth. Growth investments will largely take the form of talent additions, market expansion, and technology enhancements, as Mike mentioned. We expect to have some startup and expansion costs for the Phoenix and Frisco markets as those locations continue to build out. Our tax rate for the third quarter was up from the second quarter due primarily to the tax-exempt BOLI gain last quarter and a resulting greater mix of taxable income in the third quarter. Our capital ratios remain strong. and we now have a new $30 million authorization from our board for share buybacks. We believe our stock continues to be undervalued and that return of capital to shareholders makes sense, given our strength in earnings momentum. We believe this will enhance our EPS and our return on equity by deploying some of our capital. We are completing this buyback with very little anticipated tangible book value dilution and a short earn-back period based on current price levels that will in no way compromise our strong capital ratios. Overall, we feel very good about the solid financial results for the quarter and look forward to continued improvements. I would like to turn the presentation over to Randy for a more detailed discussion of credit and more color on the asset impairment and the release of reserves.
spk10: Thank you, Ben, and good morning, everyone. In Q3, we realized continued improvement in our primary credit metrics. As Ben mentioned, in Q3, we gained additional clarity into the final resolution of a restructured CNI credit discussed in Q3 of 2020. Part of the restructure on this non-performing loan in Q4 2020 was a partial charge down and exchange of a portion of debt for equity in the restructured borrower. We expect the remaining loan balance to be paid in full in Q4 of this year, but the anticipated final resolution will necessitate the $6.2 million impairment charge Ben mentioned in his comments. This equity impairment and loan payoff will fully resolve this credit, and we do not have any other exposure in this industry or hold equity related to any other credit transactions. As slide 15 illustrates, in Q3, non-performing assets continued to decline, ending the quarter at 0.92% of total assets due primarily to upgrades within our CNI portfolio, payoffs of nonperforming loans, and an Oreo liquidation. NPAs have decreased 36 percent during 2021, and we continue to work diligently with our clients with the goal of lowering our NPA ratio closer to historical levels. Fifty-one percent of nonperforming assets are in the energy sector and are being positively impacted by the higher commodity prices. In Q3, we also experienced continued improvement in our classified loan totals. Classified loans decreased 27% during Q3 to $124 million and have decreased 57% since the beginning of the year. Classified totals in the energy portfolio have been reduced from a high of $139 million in Q3 of 2020 to $46 million at the end of Q3 2021, and now represent 37% of classified loans. Additional details about our energy portfolio are included in the supplemental portion of the earnings deck. Our classified loan to total capital and loan loss reserves ratio has decreased from a high of 43% at the end of Q3 2020 to 17% at the end of Q3 2021. We expect this ratio to continue to show improvement in coming quarters with favorable energy prices and continued economic recovery. Moving to slide 16, Net charge-offs also continued to decline in Q3, totaling 1.3 million or 0.13% on an annualized rate of total average loans. Charge-off activity has decreased in each quarter of this year, and we anticipate the trend of lower charge-off activity to continue in the last quarter of 2021. Based on the improvement in non-performing assets, the significant decline in classified loan balances, and lower charge-off activity, in Q3, we released $10 million of loan reserves, reversing out most of the $11 million in provision expense taken in Q1 and Q2 of 2021. Despite the reserve release, we reported a total allowance for loan losses of $64.2 million, or 1.51% of total loans and 1.56% of total loans excluding PPP balances. With anticipated continued improvement in overall asset quality, we expect the reserve balance as a percentage of total loans to continue to return to historical levels. we remain on the incurred loss model for calculating the reserve requirement and continue our plan to convert to CECL in January of 2022. In closing, we believe that our improved credit metrics, solid reserve position, loan portfolio diversity, and geographic footprint in high-growth markets position us well for further loan growth as the overall economic recovery continues. I look forward to answering any questions you might have shortly. This wraps up our prepared remarks, and I'll now turn it back over to the operator to begin the Q&A portion of the call.
spk01: Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star, then the number one on your touchtone phone. If you are using speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then the number 2. At this time, we will pause momentarily to assemble the rosters. Our first question comes from Brady Gailey from KBW.
spk05: Hey, thanks. Good morning, guys.
spk09: Morning, Brady.
spk05: It was great to see loan growth reemerge here at 8% link quarter annualized. I'm just wondering what the outlook is on loan growth, especially considering Phoenix is coming online, Briscoe is coming online. It seems like You know, maybe you guys could do double-digit loan growth from here, but I'm just wondering your thoughts on, you know, the loan growth outlook.
spk09: Well, we continue to see steady growth in our pipeline. You know, part of the net growth is related to a little bit of a slowdown and churn of our portfolio. But certainly we're starting to pick up momentum in Phoenix and Frisco, and Dallas continues to see a great deal of opportunity. So we're really confident about our ability to grow loans organically. I mean, that's been our business from the beginning, and I think we're pretty good at it. And we continue to add some great talent that is going to help us do that.
spk05: Okay. And a nice step down here in expenses link quarter. Is $24 million a good kind of base run rate to think about from here and maybe throw on top a little bit of expense creep just as you're building out those two new markets? Is that the right way to think about the expense base?
spk02: Hi, Brady. It's Ben. I would actually expect we'll have something in the range of 3% to 5% expense growth, non-interest expense growth in fourth quarter, and that's almost exclusively due to talent investment. So closer to 25. Okay.
spk05: And then finally for me, you know, Ben, you mentioned the tax rate was up. I think it's around 21% the effective tax rate. Is that a good level going forward for CrossFirst?
spk02: Yeah, I would expect it to be pretty close to the 20, 21% going forward. Yeah, Q2 was a little odd because of the bully, but 2021 is a good rate going forward, Brady. Okay, great. Thanks, guys.
spk00: Thank you.
spk01: Our second question comes from the line of Jennifer Damba with Truvist Securities.
spk04: Hi, good morning. Good morning. Just wondering, with energy prices higher now, if there's a greater appetite for those types of loans going forward? And I also wanted to take the temperature on new markets outside Frisco or Phoenix. Are there any emerging opportunities over the near term? Thanks.
spk09: Well, as far as energy goes, I think it's something that we'll be prudent about. As we've said on prior calls, we want to continue to manage the percentage of our energy portfolio as a part of our overall loan portfolio. So we're going to be cautious there. But as far as new markets... We're evaluating a number of different markets. There's nothing in the near term that we have teed up, but we'll continue to look for talent and look for the right opportunities to expand as it makes sense. Right now, we're focused on building our infrastructure in Phoenix and Frisco and getting those markets up to scale. Future expansion will be prudent. We don't want to get our expenses out of line. Randy, I don't know if you want to add on energy.
spk10: Yeah, thanks, Mike. Hey, good morning, Jennifer. I would just add, as Mike said, that, you know, over time we've messaged that we want to drive that percentage down closer to 5%. At the same time, we are seeing some nice opportunities in the market to balance risk and yield. And, you know, you're seeing much tighter structures, you know, quicker repayment. And so I think that, you know, given the lifting commodity prices and the improvement in structure in the market, we are actively looking at new opportunities in that space.
spk04: Thanks so much. Thanks, Jennifer.
spk01: Our next question comes from Michael Rose with Raymond James.
spk08: Hey, good morning, everyone. Thanks for taking my questions. I just wanted to go back to loan growth. Good morning. So, obviously, a decent step down on energies was just kind of mentioned this quarter, but core CNI was up pretty strong. Can you just talk to utilization levels, how much of that was from maybe some of the newer producers or markets that you've entered into? And then just as we look forward, you know, what's the commitment you know, expectations, you know, growth and commitments, you know, this quarter and as we move forward? Do you have any sense for, you know, what we'll see as we look ahead? Thanks.
spk09: Well, you know, growth in the portfolio in large part is still being driven out of Dallas and Kansas City. We're starting to see new opportunities in Phoenix. But still, those two markets are driving poor growth. A lot of it's CNI. Utilization rates continue to be historically low. And so there's room for that to come back, which ought to help our portfolio growth. But as far as we look forward to the fourth quarter, we expect consistent loan growth with what you saw in the third quarter.
spk10: Michael, this is Randy. Hey, Michael, this is Randy. I would just add that we are seeing really good pipelines in the CNI space as we feel like that with the economic recovery, those segments are coming back. Still seeing significant churn in the real estate portfolio given the low cap rates and permanent rates, but also as you saw in our commitment total, still approving lots of good new opportunities in the real estate construction space that we'll fund up next year. Very helpful.
spk08: And maybe just switching over to deposits. You guys had a really nice remix of the deposit book here over the past two quarters. We saw some good core and reported NIM expansion. It seems like with continued growth that the margin would look to expand from here. Is that the way to think about it? And then any sense for, I assume you're going to shoot the drive positive operating leverage next year, but any sort of sense to, you know, what initial kind of 2022 NII guidance could look like. Thanks.
spk02: Hey, Michael. It's Ben. I might just talk to the deposits and the margin first. We do think that there will be some pressure, top line on margin, right? Pricing for loans continues to become more and more competitive and But the bottom half of the equation is we do have a fair amount of continued repricing. Of course, there's a lag, as you would imagine, in the deposit structure, and we will continue to have some CDs roll off and reprice in the fourth quarter, which will allow us to drive cost of funding down a little bit. There may be a basis point of annualized pricing room left on deposits, but not a lot. In regard to leverage, absolutely. Our intention is to continue to grow that as we think about continuing to get our loan engine restarted here.
spk09: Michael, I'd just add on the deposit side, we're laser focused on growing our DDA base, and our team's done a fantastic job of focusing on that this year, and we'll continue to. Randy talked to the C&I opportunities that we're seeing in the market, and the nice thing about that, is we're getting full relationships with those accounts, and so we're getting the treasury business, the credit card business, and all the ancillary products that go along with that. So it's just been a real focus of ours, and it's starting to pay dividends.
spk08: Got it. And then maybe just one final one for me, just looking at the slides where you have the market opportunities, is the way to read that, those are markets that we could expect to see are you planning to expand into over time? And it's interesting that four of those markets out of the seven are in Texas. So obviously, Dallas has been a good piece of the growth as we move forward. But if you answered some of those other markets, maybe it might imply you guys remove your headquarters down there at some point. But in all seriousness, it just seems like there's a lot of flags planted there. And, you know, how should we read that as we as we think about the opportunities that move forward? Thanks.
spk09: Well, Michael, I like living in Kansas City, and it's a cheap southwest flight to Dallas. So I don't know if we're going to move any big buildings anytime soon. But, you know, Texas is a focus of ours. Clearly, if you look at the map, we think we have more opportunity to expand there. There's a lot of terrific dynamic markets there, and we're going to continue to invest in Texas, and we're going to continue to invest in talent in Texas. that is a big part of our future, no question. You know, we're trying to identify markets that we believe are outgrowing the normal markets. If you look at Phoenix, Denver, Nashville, some of those markets outside of Texas are huge beneficiaries of the exodus of people leaving California and going to maybe more business-friendly states. And so we think those markets in time will provide us an opportunity to grow. That's why the map looks that way. With our branch-wide technology-focused business model, we can manage markets remotely. Our strategy on new markets is really driven by people. It's just a matter of finding the right talent. I think Phoenix is a great example of a market where we were able to recruit a great leader who's been able to begin to build a terrific team. And so that's really the core of how we think about expansion.
spk08: Understood. And I guess the Cowboys jersey that Heather has for you, you're not going to wear, huh? Just kidding.
spk09: Thanks. Hey, if it will drive our stock price, I'll wear a Cowboy hat or whatever we need to do.
spk08: Thanks, all.
spk09: Thank you.
spk01: Our next question comes from the line of Andrew Leash from Piper Sandler.
spk07: Good morning. Thanks for taking the questions.
spk01: Morning, Andrew.
spk07: Just want to follow up on the expense outlook here. And you referenced hiring a new chief technology officer. Obviously, Ben coming on as CFO. But if you look at management, are there any other positions that need to be filled? How are you feeling with the team right now?
spk09: You know, our management team is pretty well built out. You know, you might see us expand in Texas as we continue to grow that state. And, you know, I think it would be a reasonable expectation to see us continue to invest in talent in Texas.
spk02: And, Andrew, that will – Andrew, I was just going to add, that's really production revenue generation talent will be the major focus. That's right. Got it. Got it.
spk07: Yeah, that was my follow-up there. Thanks. And then just on the buyback, you have completed the last two very quickly. Is that kind of the same pace that you're expecting now with this newest one?
spk02: Well, it depends on our price, Andrew, but generally I think we'll try to execute that over a quarter or two or possibly three, depending on what the price does. You know, the math is pretty simple, right? Our book value, I think, at the end of the quarter was $12.79, and you can see where that relates in regard to our share price. So I think we'll be fairly aggressive as the price hovers where it is now and subject to moves through the next couple quarters. Got it.
spk07: Thanks. You've covered all my other questions. Sure.
spk01: Thanks, Andrew. Our last question comes from Matt Olney with Stephens.
spk06: Thanks. Good morning, guys. Good morning. Good morning, Matt. I guess, Ben, you mentioned the pressure on the loan yield a few minutes ago. Any more color you can provide on that? And specifically, do you have the newer loan yields on some of the newer loan production? And then the second part of that is it looks like on slide 10 there was some noise on the 3Q loan yields on the non-accrual chart changes? Any more details behind that? Thanks.
spk02: Sure. I can tell you, as I said, I think in my remarks and you saw in the DAC, we actually had an increase in yield in the quarter versus Q2, although for To peel that back a little bit, that had clearly slowed down at the end of the quarter, and we experienced certainly more pressure in September than we did in July and August, and I expect that will continue. As we add new loans, of course, those don't have a huge impact on the asset base, but they will have some impact. I think we're continuing to see loans come on at an average in the upper threes, but they are certainly under some pressure. I'm going to flip to page 10 here to make sure I'm following your question. Randy, you correct me if I'm wrong. I think the noise really would be we did have some loans get upgraded and come off of non-accrual, which triggered a little bit of incremental recognition in the quarter. Is that a That's correct, say that, Randy.
spk10: I was attributable to several upgrades back onto performing status that impacted that.
spk06: And are there any numbers you can put behind that so we can appreciate just the level of that impact?
spk02: I'd probably have to do some research to give you a number unless you do, Randy, but Heather and I would be happy to cover that with you, Matt.
spk06: We can follow up with you after the call. Yep, that's fine. That's fine. Okay. And then I guess, you know, changing topics here, you mentioned the allowance ratio could decline again in the near term. I want to make sure I'm interpreting this right. Are you saying there could be another quarter of negative provision expense? In the fourth quarter, are you just saying we could see immaterial level of provision expense along with some normal loan growth? Thanks.
spk10: Yeah, Matt, this is Randy. I'll take that. So, you know, at this point, at the end of the quarter, we feel are adequately reserved, but there are a lot of moving pieces into the appropriate reserve level, one being loan growth, another being, you know, continued improvement in our classified assets. As I said, we're still on the incurred loss model, so as we continue to see upgrades in the portfolio, that will drive lower reserve levels. And so the next factor that will come in is we are planning to convert to CECL in January of 2022. So we'll factor all that in and look at the reserve level. We certainly would not anticipate any material provision. And, again, we'll keep all options on the table as we work through the quarter, including an additional negative provision.
spk06: Okay, great.
spk01: Thanks, guys.
spk00: Thanks, Matt.
spk01: This concludes our question and answer session. I would like to turn the conference back over to President and CEO Mike Maddox for any closing remarks.
spk09: Again, I just want to thank everybody for participating on the call today. We're very excited about our progress in the future and where we're headed. We continue to improve and Really look forward to the rest of the year. So thank you all for being here, and we'll talk to you soon.
spk01: Okay. Thank you. Please direct any follow-up calls to Heather at crossfirst.com. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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