CrossFirst Bankshares Inc (CFB) 2021 Q2 法說會逐字稿

Thank you for standing by, and welcome to CrossFirst Q2 2021 Earnings Call. (Operator Instructions). Please be advised that today's conference may be recorded. (Operator Instructions).

I would now like to hand the conference over to your host, Matt Needham, Director of Investor Relations. Please go ahead.

Welcome, and thank you for joining us today. On the call are Mike Maddox, our President and CEO; Dave O'Toole, our Chief Investment Officer and former Chief Financial Officer; and Randy Rapp, our Chief Credit and Chief Risk Officer. Our new Chief Financial Officer, Ben Clouse, will also be available during the Q&A portion of the call. As a reminder, a telephonic replay of this call will be available on our Investor Relations website.

Before we get underway, let me remind you that our release, quarterly investor update and presentation slides that accompany this call are available on the Investor Relations website.

Slide 2 is a cautionary statement, I want to point out that in our remarks this afternoon, we will be discussing forward-looking information, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. we provide a comprehensive list of risk factors in our SEC filings, which I encourage you to review.

Reconciliations of non-GAAP financial measures to the nearest comparable GAAP measures are included in the release and presentation, copies of which are also available on our IR website. All earnings per share metrics discussed on today's call are provided on a diluted per share basis.

I'd now like to turn the call over to Mike Maddox.

Thank you, Matt, and thank you to everyone for joining the call. Before we get into the quarterly performance, I do want to take a moment to honor our former CEO, George Jones. We are deeply saddened by George's passing, and we are lucky to have had him with our company. George's leadership and mentorship could play a critical role in our company's success.

George taught me and many of us so much. One of his greatest strengths was his ability to connect with people. We will remember his extraordinary service across our entire company and throughout our industry for years to come. We offer our deepest condolences to [Mariam], his kids and the rest of George's family.

As we begin to look forward, I'd like to introduce the newest member of our management team, who is joining us today. I am pleased that with the hiring of our new Chief Financial Officer, as we have filled out our management team. After conducting a nationwide search, we found a terrific and well-qualified CFO right here in Kansas City. Our new CFO, Ben Clouse, recently started with us on July 12, and will be a key part of our leadership team.

I know Ben will be instrumental in helping us grow strategically by also meeting the evolving and changing needs of our clients. Ben has over 20 years of experience and is joining us from Waddell & Reed where he was Senior Vice President and CFO for the last 3-plus years. I'm glad to have Ben here with us today and on the team.

After a challenging 2020, our first quarter of 2021 demonstrated great strength in our core operating business, and we are excited to announce that our second quarter produced the best quarterly earnings in company's history. As we move into discussing our strong quarterly results, our operating revenue grew 6% during the second quarter, and combined with reduced provisioning, led to a record $15.6 million of net income and pretax pre-provision profit of $22.3 million, earnings per share of $0.30.

With these strong results, we achieved a return on average assets of 1.10% and return on average common equity of 9.86%. We also managed our balance sheet to reduce out asset size, which improved net interest margin to 3.12% for the quarter. I'm extremely proud of the team's focus, performance and progress toward our strategic goals. The team has been laser-focused on improving our profitability and their efforts can be seen in the numbers.

During the second quarter, we thoughtfully improved the company's balance sheet efficiency and strengthened our profitability metrics. CrossFirst is committed to helping our local businesses and communities we serve especially during the pandemic. Our dedication to our customers led to holding low-margin PPP loans and excess cash from economic stimulus pumped into the economy. During the quarter, we were able to assist our customers in obtaining forgiveness for $161 million of PPP loans and had nearly $100 million of C&I paydowns and reduced our excess cash balance.

In managing our deposits, we allowed nonrelationship and institutional deposits that were a drag on margin to roll off the balance sheet. While our overall growth metrics were impacted, we increased our margin by 12 basis points from the previous quarter. We also continue to execute on our strategy of growing noninterest-bearing deposits and we're able to increase demand deposits by 3% from the previous quarter and by 9% over the last year's second quarter.

These steps contributed to a stronger deposit mix that now has 19% of our total deposits in demand deposit accounts. While there is still some residual impact on our loan growth from pandemic-related activity, we expect our continued expansion efforts to help us drive loan and balance sheet growth in future quarters.

As the economy reopens and oil prices stabilize, we are seeing significant improvement in our credit metrics. While we added to the reserve during the quarter, I am pleased to announce a substantial decline in our classified assets, lower nonperforming assets and reduced charge-off activity. We expect to see continued improvement throughout the second half of the year, which should lead to further upgrades in our loan portfolio.

We also completed the $20 million share repurchase program at a weighted average price of $12.68 per share. The combination of the share repurchase program ending adjustments to the balance sheet and improved performance led to increased capital ratios during the second quarter. Our strong capital position allows us to continue to evaluate growth and expansion opportunities.

Our path to success is grounded in the ideals of one team, one bank with a shared vision of success. We remain focused and dedicated to our purpose of serving people in extraordinary ways and to our promise to contribute to the well-being of our employees, clients and the communities. Attracting and retaining the highest quality talent is of utmost importance. It is the key to our successful execution of our plan.

In June, we announced our entry into the Phoenix, Arizona market. I am pleased to announce that we recently received regulatory approval for our full-service Phoenix location. Like all of our expansion efforts, the decision to enter the market was opportunistic and centered around finding the right talent. The people who fit our culture, our relationship banking model and who will effectively compete and grow our presence in the market.

Our new Arizona market President, Kevin Halloran, comes to us with over 35 years of experience in the Phoenix banking community. We were able to take advantage of market disruption that allowed us to land the right leader for the market.

Kevin has also hired 2 experienced commercial bankers with long tenure in Phoenix. We believe this team can grow to scale in a short period of time. The decision to go to Arizona was also a natural extension of our current customer base. We already have a number of customers located in Phoenix. We will continue to expand into other metropolitan markets to fill in our geographic footprint over time. It will be driven by hiring great talent or through the right strategic acquisition. We know how to grow organically, and that will continue to be our primary focus.

We remain excited about our growth in the Dallas-Fort Worth area. As a part of that growth, we are making progress in Frisco as we build out our team. Texas continues to be a strategic focus for the company. We will continue to add market talent and look to expand our presence across Texas where there is tremendous opportunity.

Before we get into the detail of our financial performance, I'd again like to thank Dave O’Toole for his hard work and dedication with CrossFirst on what will be his last earnings call with the company. Dave will continue to be with the team for the next year as Chief Investment Officer, and I look forward to a successful transition of the CFO role to Ben. Thank you, Dave, for your contributions to the company over the last 13 years.

I'll now turn the call over to Dave to take everyone through the financial details of our results.

Good afternoon, everyone. And Mike, thank you for your kind words and comments. I appreciate your support. We had a great quarter and continue to post positive operating revenue performance. In the second quarter, revenue improved to $48 million, up 6% from the previous quarter, and 10% from the same quarter in the prior year. Revenue growth for the quarter was achieved by a combination of factors, including net interest income of $42.3 million.

While historically, we have had strong balance sheet growth driving our operating revenue performance. This quarter, we focused on improving margin by being prudent with our loan and deposit pricing decisions. The strategy allowed us to create a much more efficient balance sheet, reduce noncore funding, concentrate on PPP forgiveness, and focus on core customer relationships with the objective to strengthen and grow earnings.

Noninterest income for the quarter was $5.8 million, a 41% increase from the previous quarter. We had another solid quarter for service charges and credit card fees compared to the second quarter of 2020, and we recorded a onetime nontaxable insurance recovery.

For the quarter, NIM increased to 3.12% on a fully tax equivalent basis compared to 3% in the previous quarter. When comparing Q2, 2021 to the previous quarter, earning asset yields improved 7 basis points and cost of funds declined by 7 basis points. The year-over-year NIM decline can be attributed to a 39 basis point decline in tax-equivalent earning asset yields that were partially offset by a 36 basis point reduction in cost of funds.

During the quarter, we strategically reduced our asset size by nearly $700 million as we continued to adjust deposit pricing. These adjustments increased the loan-to-deposit ratio to 97%, making our balance sheet significantly more efficient. Historically, we have used wholesale, brokered and institutional funding to support our growth initiatives, which allowed us to be more nimble with our excess liquidity in the current environment.

The investment portfolio continues to be a great source of revenue for the company, and we had an unrealized gain at the end of the quarter of nearly $35 million in the portfolio. Overall, we grew portfolio holdings during the quarter and purchased approximately $49 million of new taxable and tax-free securities to reinvest the cash flows from the existing portfolio and to deploy some of our excess liquidity.

We continue to maintain our investment strategy and have been increasing the municipal bond allocation as a percentage of the portfolio for several quarters. At the end of the second quarter, it represented nearly 74% of our $712 million portfolio. While we have seen some small yield declines in the portfolio during the last couple of years, using municipals has allowed us to limit the decline in yield and maintain duration fairly steady.

Noninterest expenses for the quarter were $25.8 million, $3 million higher than Q1, but lower than the second quarter of 2020. Total expenses increased 13% for the quarter because we incurred additional charges in the second quarter of 2021 related to the acceleration of approximately $700,000 of certain cash and stock-based compensation for a former employee and another $600,000 valuation adjustment that was required for an OREO property.

Additionally, the company's operating expenses are normalizing from the lower levels incurred during the pandemic. Noninterest expense is lower than the second quarter of 2020, primarily due to the onetime $7.4 million goodwill impairment charge that we recorded in 2020. The onetime adjustments, combined with the balance sheet changes create some noise with our expense ratios this quarter.

For the quarter, noninterest expense to average assets increased to 1.82% and assets per employee decreased to $15.9 million. As we continue to focus on positive operating leverage, we expect those metrics will improve and trend back to previous levels.

For the second quarter, we posted a 53.6% efficiency ratio and a year-to-date ratio of 52.1%, a significant decline from 63.3% compared to the same year-to-date period in 2020. In addition to the expenses I just discussed, during the quarter, we incurred start-up and expansion cost for the Phoenix and Frisco locations.

As Mike indicated, we experienced the most profitable quarter in our history, $15.6 million in net income, which is an increase of 29.4% from the previous quarter, commensurate with growing operating revenue and inclusive of provisioning $3.5 million in the current quarter.

Quarterly return on average assets continues to improve, climbing to 1.1% and a pretax pre-provision return on average assets of 1.58%. We are excited to have achieved a greater than 1% return on average assets this quarter and believe this is a fairly good indication of our earnings momentum.

Capital ratios remained strong. And as Mike mentioned, we completed the share repurchase program during the quarter. For the full program, we repurchased almost 1.6 million shares of stock, resulting in tangible book value per share of $12.50 at quarter end, and total stockholders' equity on June 30, 2021, of $637 million. Overall, we feel good about the financial results for the quarter and look forward to continued improvement.

Before I turn it over to Randy for a discussion of credit, I would like to share a few parting thoughts since this is my last opportunity. I'd like to thank our founding Board Members and shareholders who funded our startup in 2007 and supported me as their CFO. Many of these folks are on this call and are still involved, but some have moved on. I'm also grateful for Ron Baldwin and the late George Jones, who also supported me during their time as CEO. They were both a big part of making us who we are today. I have actually grown to enjoy this day each quarter, explaining CrossFirst's financial results to the investment community and our talented analysts without embarrassing myself or my associates was professionally challenging and rewarding. I will miss it.

Thanks, again, all of you. And now let's move on to Randy to take you through a discussion of credit.

Thank you, Dave, and good afternoon, everyone. As the charts illustrate, our overall credit metrics continued to generally improve in Q2 as we experienced significant positive grade migration attributable to the economic recovery and improvement in oil and gas prices. Our classified loans decreased almost $100 million from the prior quarter, and we expect that trend to continue in the last half of 2021, assuming that the economy and our customers continue to recover as the pandemic subsides.

Our classified, the total capital and loan loss reserve ratio has decreased from a high of 43% at the end of Q3, 2020, to 24% at the end of Q2 2021. We will continue to work with our clients and would like to drive that ratio below 20% by the end of the year.

At the end of the second quarter, we have an allowance for loan losses to total loans of 1.78%, which increased from the prior quarter and is well above historical levels. We remain on the incurred loss model for calculating the reserve requirement and continue to plan to adopt CECL on January 1, 2020 -- 2022.

Continued improvements in credit quality, positive loan grade migration and lower anticipated charge-off activity could lead to much lower provisioning in Q3 and Q4. The percentage of classified loans to total loans has declined to 4% at the end of the second quarter, and we are actively working with borrowers with a goal of reducing this ratio back to the pre-pandemic levels of 2% or lower.

We do continue to carry a small number of modified loans on our balance sheet related to industries heavily impacted by the pandemic, but new deferral requests are minimal. Also, our nonaccrual and past due levels are trending positively. Several industries contributed to the spike in classified loans in 2020, led by the energy portfolio, which experienced significant price decreases starting in Q1.

Other affected portfolios include various C&I related industries and certain property types in the commercial real estate portfolio, including senior housing and hospitality, which were directly impacted by the pandemic.

During the uncertainty of 2020, we recorded net loan downgrades of $182 million to classified. At this point in the recovery, we have already had net upgrades to classified loans of $115 million during the first half of 2021. If the economic expansion continues and energy prices remain stable, we anticipate seeing continued positive grade migration throughout the remainder of 2021. We Energy-related transactions account for 43% of classified loans, but decreased 38% during Q2.

We have only partially completed our spring borrowing base redeterminations and expect to see further positive grade migration in that portfolio in Q3 and Q4. Nonperforming assets continued to decrease, ending Q2 at 1.09% of total assets due primarily to upgrades within our energy and C&I portfolios, loan payoffs and OREO liquidations.

We are diligently working with our customers with the goal of lowering our NPA ratio below 1% and closer to historical level. Net charge-offs decreased significantly in Q2 to 0.23% of average loans versus 0.74% reported last quarter and 1.03% in Q4 2020. A couple of C&I loans totaling $2.6 million were charged off this quarter. We anticipate the trend of lower charge-off activity to continue in the last half of 2021.

In closing, we believe that our strong credit culture, targeted market and client focus and loan portfolio diversity position us well for further growth as the economic recovery continues, and 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.

(Operator Instructions). Our first question comes from the line of Brady Gailey of KBW.

I want to start on loan growth ex PPP. your non-PPP loan balances, I think, were down a little over 10% annualized in the quarter. But here, normally, you guys are such a growth company. I don't think we've ever seen non-PPP loans down. But any sort of commentary there? I know you all were strategically shrinking the asset base and some deposits. Were there any strategic shrinkage on the loan side this quarter too?

Well, our loan totals were impacted by cleaning up some of our credit quality for sure. But I think, Brady, we're in the same boat as a lot of -- everybody in our industry. I mean, on the CRE side with the low cap rates and the really low permanent loan rates, we've seen our real estate customers selling properties and taking properties to the permanent market, which has probably increased some of our payoff activity in that area.

And then on the C&I side, we're sitting on a pretty sizable pipeline, but those C&I deals just tend to be being pushed out and taking a little longer to get closed. So I think you're seeing that with a lot of people is loan growth is tough right now. But we have a strong pipeline, and we continue to believe that the second half of the year will be strong.

Okay. And then on the expense side, I know you guys had a couple of onetime in nature expenses. But I think if you even back that out, expenses were about $24.5 million. That was a little higher than maybe the $23 million mark that you talked about. Maybe just an update on how you think about the expense run rate from here, especially as you're adding Phoenix into the mix?

Yes, Brady, it's Dave. In addition to what we disclosed there that was onetime stuff. We did have some additional costs associated with Phoenix and Frisco. We believe that number is somewhere in the $300,000 range that we'll probably continue on. The rest of the expenses were just a function of normalizing from the lower levels they were at in the pandemic. So I think as you look forward, your expense run rate, probably the only adjustment realistically is the 2 nonrecurring items.

Okay. All right. And then it's great to see the buyback continue in the quarter. Now that you're done with your previous buyback program, will we see a new buyback program coming up soon?

Brady, we do have a lot of capital. Our first option and our first goal is to really deploy that capital with growth. And so we're really focused on either organic growth opportunities, which you're seeing what we're doing in Phoenix. And we're constantly out there trying to build relationships and find possible partnering opportunities. So we don't have any plans to do another buyback today, but I'm sure we'll look at all of our options.

Okay. And then just lastly for me. Saw the couple of million of PPPs taken in the quarter. How many PPPs remain at this point?

We have a couple of million dollars left at PPP fees to recognize, Brady. But the bulk of those are on the second round of PPP, which those loans have a little longer term. So they'll be a little slower to be returned. I think we have somewhere between $500,000 and $600,000 from the first group that most of which will probably come out this quarter.

Our next question comes from Michael Rose of Raymond James.

Just going back to the loan growth. If I look in the back of the presentation, it looks like unfunded commitments were up about $400 million. Mike, you just talked about deals taking a little bit longer to close, but that's a nice increase quarter-on-quarter. So maybe can you just talk about what drove that growth? And would you expect the pull-through rate to pick up as we move into the back half of the year?

And then layering on to that, obviously, the expansion out West, what can we expect over the next couple of quarters from that team. I know they're off to a fast start from when we talked last, but just trying to size up the opportunity and what actual growth could look like ex PPP as we move over the next couple of quarters.

Yes. You make a good point. Our line utilization in our C&I portfolio typically runs around 48%, 49%. Right now, it's about 38%. So we're still seeing a lot of customers sitting on a lot of cash and probably a lot of that from the stimulus. But we made about 300 -- a little over $300 million in new commitments in the second quarter in loans and about $100 million of that funded.

And so we believe that -- and that's really divided pretty evenly between commercial real estate and C&I. We've seen nice growth in our health care portfolio, some service industry credit. And our enterprise value portfolio continues to perform well. So pretty diversified growth. As I said earlier, we have a strong pipeline.

And then Phoenix. We've hired Kevin and he's hired 2 terrific bankers, one who will focus on C&I lending and one who will focus on commercial real estate. And we believe we have a tremendous opportunity out there. They're already putting points on the board. And we think that's a market that can really perform well for us.

All right. Great. And then so the deposit runoff, if I look at the kind of the average balances versus the period end balances, it seems like a lot of that came off in the back half of the quarter. And just trying to think about the impact on the margin. Obviously, it was up this quarter, partly because of that. But as we think about the third quarter, should we actually think about the core margin ex PPP continuing to move higher from here?

Yes, Michael, this is Dave. I think that is the right conclusion with margin. I think it will move forward. And you're exactly right. The average balance of our liquidity is not the same as the quarter end balance was. Most of our decline happened towards the end of the quarter. So we had a lot of excess liquidity during the quarter, that's now gone. And so in the third quarter, we'll get some benefit from that.

So we like the position of our balance sheet and the rest of our earning assets and our ability yet to lower our cost of funds a little bit further, should promote certainly at least 3.12%, but we think probably some improvement on that with NIM in the third quarter. Loan fees are the item that's hard to determine in our margin calculation in the third quarter. It kind of depends on what the loan activity does. But I think you could see margin move a little bit higher.

All right. Great. And then maybe just one final one for me just on the energy book. You still have a decent amount that's kind of criticized and classified. We've seen the price of oil move up. What's the outlook there? And you're starting to see some banks talk about actual growth as we move into the back half of the year. So would just love an update on the energy book and what we could expect in terms of migration and growth?

Michael, this is Randy. As we said, we saw a significant positive grade migration in that portfolio in Q2. We expect that to continue in Q3. You're right, we're definitely in a higher price environment, but it does take a period of time for that to flow through from the well to then our borrowers. And as we look at our redeterminations, we wanted to see Q1 financials to see that flowing through, and we're seeing that. And so we saw good upward migration in Q2. And again, we expect to see that in Q3.

As it relates to new activity, as we've stated, over time, we want that percentage to -- of the book to continue to decline, but that can also happen with the other segments growing up around it. And so we're -- our stance here is we're going to be opportunistic on some new opportunities, and we think that some of those are out there.

Our next question comes from Andrew Liesch of Piper Sandler.

Just a follow-up question on the kind of the improvement with the balance sheet efficiency there. Are there any other opportunities for further improvement on that front?

I think we've probably compressed our balance sheet about as far as we want to. There are opportunities, but it would involve going into the investment portfolio. And right now, we like those earning assets on our books. There's no reason, in my opinion, to take them off the books and continue to shrink down the balance sheet. So I think it's about as efficient as it's going to get. We'd like to see it start ramping up in the third quarter.

Got it. That's helpful. And then just maybe I missed it earlier, the other fee income line, just to true something up, looks like that was up about $700,000. Is there anything onetime in nature in that item?

Not that I recall off the top of my head for the $700,000 item. And it's a combination of items that go into that bucket.

Right, right. And then just lastly, what -- the tax rate for a couple of quarters now has been below what I've been looking for. I think some of that was benefited from the nontaxable gain. But what tax rate do you think we should be using going forward?

Yes, I've been continuing to tell you all to model it at 21%, and we're not running -- our effective tax rate has consistently been less than that. I'd probably move to about a 19% number. What's driving that is we have actually made some investments in some tax credit bonds that's helping reduce our taxable -- our tax liability. So it's a combination of the tax-free items that are on our books right now and some specific tax credit securities that we purchased. So I'd probably model out at 19% or 19.5% rather than 21%.

Our next question comes from Jennifer Demba of Truist.

Just wondering what markets you might be interested in for further de novo expansion in the future beyond Frisco and Phoenix and...

Well, we're -- we want to continue to grow our presence in Texas. And we believe we have more room for expansion in the Dallas-Fort Worth Metroplex. There are other major cities in Texas, like San Antonio, Austin and Houston that if we found the right opportunity would be interesting for us in the future. And then outside of Texas, Phoenix was a market we had we've been interested in for a while. And we think Denver is another market that will fit our model well and may provide us some opportunity. And we're not uncomfortable doing it in a de novo manner, but if we found the right opportunity, we wouldn't be opposed to doing something through M&A either.

Okay. And what kind of -- what are you seeing out there in terms of wage pressure when you do try and hire new talent?

Well, it's unique by market, and every market offers different challenges. But there's no question, there's a lot of competition right now for talent and there is pressure on wages. And we're trying to ensure that we're remaining competitive. And we've been able to hire some really great talent over the last quarter or 2, and we expect we'll be able to continue to do so.

Our next question comes from Matt Olney of Stephens.

Most of my questions have been addressed, but on credits, we got a great report from Randy for the second quarter, and it sounds like there's more good news on the way in the back half of the year. And I don't want to get too far ahead of things, but when thinking about provision expense for loan losses, is it possible to see this provision expense be 0 in the future or even negative in the back half of the year?

Matt, this is Randy. Happy to take that. Matt, historically, we've carried a lower reserve level than we have today. As we move past the pandemic, we envision moving back towards that historical level. As we -- Dave announced, we did reduce our provision in Q2. And as we go into Q3, we'll keep all options in front of us and available, including a negative provision, if warranted. That decision will really be based on economic conditions, energy prices, charge-off activity, grade migration and loan growth. But again, we will look at all options.

Matt, our goal is to grow into our existing provision ideally. But as loan growth continues to be challenging for everybody, we're going to have to look at all options as we look at our reserve. And Randy and the team are doing a great job with credit. And as we expected, we expected our credit would improve and it is.

Okay. And I guess switching gears, you guys added a nice disclosure on Slide 22 with respect to interest rate sensitivity. And it looks like you're relatively rate neutral at this point. I think the future's curve and forecast points to Fed tightening sometime in late '22 or '23. And assuming that's right, do you expect to maintain this current neutral profile? Or would you consider leaning more into being asset sensitive over the next year?

We're pretty comfortable currently being close to neutral, Matt, on our sensitivity. But clearly, as we look forward, we may want to start extending some liabilities at some point in time, either doing that with a swap on the balance sheet or looking for other means to do that to make us a little more asset sensitive, but I wouldn't be in a rush to do that at this stage of the game. But we're not opposed to doing it if we feel like the signs are out there for increasing rates. And we think we're flexible enough that we can make that decision easily.

Okay. Congrats on the quarter.

Thank you. At this time, I'd like to turn the call back over to Matt Needham for closing remarks. Sir?

Thank you for joining us today on the call. As a quick reminder, this call can be accessed via a replay on our website. And as always, you can contact me with any follow-up questions you might have. Again, we appreciate your interest or continued investment in our company, and thank you for joining us this afternoon. Take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.