Q1 2021 Crossfirst Bankshares Inc Earnings Call
[music].
Good day, and thank you for standing by.
Welcome to the cross for Q1 from 'twenty one.
The earnings conference call at this time, all participants are in a listen only mode. After the Speakers' presentation. There was the question and answer session.
That's the question during the session you will need the press star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further <expletive>istance. Please press star zero I would now like to hand, the conference over to your Speaker today, Matt Needham Director of Investor Relations. Please go ahead.
Welcome and thank you for joining us today on the call on the call are Mike Maddox, President and CEO, Dave O'toole, Chief Financial Officer, and Randy Rapp, Chief risk and Chief Credit Officer. As a reminder of telephonic replay of this call along with our earnings release and presentation will be available on our Investor Relations website.
Before we get underway I remember.
Let me remind you that our release.
Orderly investor update and presentation slides that accompany this call are available on the cross the first Investor Relations website.
Slide two 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 risks factors and I encourage you to review them.
Reconciliations of all non-GAAP financial measures to the nearest comparable GAAP measures are included in the release or presentation copies of which are also available on the website all earnings per share metrics. Today are discussed on the diluted per share basis, I'd now like to turn the call over to Mike Maddox. Thanks.
Thank you, Matt and thank you to everybody for joining the call.
Our earnings this quarter showed continued momentum in the strengthening of our core business.
Strategically we have been focused on continually improving our earnings reducing our risk and improving our credit metrics post pandemic.
Despite elevated provisioning margin compression and the pandemic, we had the most profitable quarter in our company's history.
This is due to our continued growth increased revenue and the positive impact of the efficiency initiatives implemented during 2020.
The company finished the first quarter of 2021 was just under 6 billion in <expletive>ets.
Our performance metrics are continuing to trend in the right direction and our <expletive>et quality continues to improve as the economy recovers and the energy prices stabilize.
Net income for the first quarter was a company record of $12 million.
Which included a provision of seven of half a million and resulted in earnings per share of 23.
We continue to grow operating revenue and our pretax pre provision profit was again the best in company's history.
I'm extremely proud to report an efficiency ratio approaching 50%.
Which has steadily improved since our initial investment in Dallas during 19 or during 2017.
During the first quarter of 2021, we had a strong deposit growth of 8% and we are pleased that our DDA accounts grew 11%.
Excluding PPP loans.
The loan portfolio grew 4% compared to the first quarter of 2020 and 1% from our previous quarter.
We continue to allocate additional reserves to the industry segments, most affected by the pandemic and are comfortable with our current reserve levels.
We are pleased that our nonperforming <expletive>ets and cl<expletive>ified <expletive>ets decreased for the quarter and we expect to see continued improvement over the coming quarters.
Based on our current loan portfolio trends the.
Outlook for the economy and the outlook for the economy, we expect our loan provisioning to moderate through the remainder of 2021.
Lastly, our capital ratios remained strong and we continue to execute on our stock repurchase plan.
Our path to success is grounded in the ideals of one team one bank with a shared vision of success. We are one team working together moving our company forward.
We remain focused and dedicated to our purpose of serving people in extraordinary ways into our promise to contribute to the wellbeing of our employees clients and the communities we serve.
For us to be successful in executing our business plan, attracting and retaining the highest quality talent remains a strategic focus.
I'd like to spend a few minutes to address some of the strategic changes that are occurring within our management team.
As you probably read in our March announcement, our Chief Financial Officer, and Chief Investment Officer, Dave O'toole, who has announced his plan to retire from cross first after nearly 15 years of service.
He has had a long career in banking and banking advisory services.
Dave is finishing up his storied career with cross first after helping take the company public in 2019.
Dave is a founding shareholder board member.
And a friend and he has been instrumental in helping us become one of the most successful banks in the 2007 de Novo cl<expletive>.
We've executed on our strong relationship banking model that has led to a compounded annual <expletive>et growth rate of 52% since our founding in 2007.
During Dave's tenure, our footprint has expanded from 3000 square foot office suite in Overland Park, Kansas to eight locations in four states and just under 6 billion in <expletive>ets.
They will continue serving as CFO until the company identifies the successor.
Once our new CFO is hired Dave will step down from that role and continue to serve as our chief investment officer through the end of 'twenty to 'twenty two.
We are currently working through a national search process to find our next CFO.
During the quarter, we consolidated the leadership of our enterprise risk and credit management teams under Randy Rapp.
Randy now <expletive>umes the roles of boat Chief Credit Officer, and Chief Risk Officer.
This structure allows us to better leverage his expertise in these areas increase efficiencies and enhance our capabilities for future growth.
Tom Robinson will take on the title of the executive director of risk in credit and will work closely with Randy to oversee these areas.
Tom continues to provide us great experience and depth in our credit group.
And the support we need for growth.
While continuing to be the point person with our regulators.
I want to recognize the time for the outstanding job. He has done in building out our enterprise risk management team and practices over the last two years.
Yeah.
Another major initiative in our strategic plan is making sure we stay competitive and current with our technology platforms.
This is imperative in today's competitive banking landscape.
We are evaluating new technologies that will further enhance our products customer experience at efficiencies.
Our new Chief Technology Officer Jan of Murfin.
This benchmarking our technologies across the company to allow us to effectively grow rich.
The reduced customer acquisition cost provide customer convenience and more efficiently serve our growing client base.
We also recently made a small investment in the bank focused technology fund that we hope will keep us informed and provide us access to the most current technology available.
The pandemic has accelerated the adoption of technology.
And we expect to see increased investment and competition from the growing fintech industry.
I would now like to provide a brief update to our COVID-19 the plan and our perspective on our economic outlook.
I'm happy to report that we reopened our lobbies to the public on March 1st.
And commenced our return to work plan for our employees on the April 5th.
We continue to prioritize the health and safety of our employees and clients and we are excited to increase in person interactions as conditions permit.
We continue to work with our employees and provide flexibility for in office and remote working opportunities where necessary.
We are cautiously optimistic that the economic outlook will continue to improve as vaccinations rollout in the fiscal stimulus package fuels growth and consumer confidence.
The continued reopening of our local economies and increases of national discretionary spending should provide a boost of several industries, including travel leisure and hospitality.
Additionally, the oil and gas markets of bounce back from last year's historic lows with the more favorable industry outlook.
In the first quarter of this year, we booked $111 million of second round P. P. P loans, mostly to existing customers and we were able to process of $67 million and loan forgiveness.
Slide seven provides you with a complete overview of our fee recognition on these loans.
And we will continue to work with our customers to take these loans through the forgiveness process.
We believe the vast majority of these loans will be successfully forgiven by the SBA.
While there still remains uncertainty surrounding how the enduring pandemic driven changes will affect different industries, we believe that the physical stimulus and improve local economies create a favorable scenario for our customers.
We expect our balance sheet to continue to grow and our pipeline remains very strong.
During the quarter, we funded $312 million of new loans from new and existing customers.
And we will continue to evaluate new market expansions and potential acquisitions to further supplement our growth strategy.
I am really proud of how our teams of managed our risk and progressed on our strategic initiatives in the first quarter of this year.
I am very optimistic for our future.
I want to congratulate and thank all of our employees for their hard work and dedication over the last 12 months.
Their efforts have really been truly amazing.
We look forward to focusing on growth as the vaccination process continues and our cities continue to open up.
Now like David to take you through the financial details of our results.
Thank you, Mike and good afternoon, everyone.
Our history of growth has provided the foundation for growing operating revenues.
Combined with recent efficiency efforts, we are reporting record quarterly net income operating revenue and pretax pre provision profits.
As Mike indicated we just completed the most profitable quarter in our history.
<unk> million and net income and our pretax pre provision profit grew 24% over the last year and 8% during the quarter.
For the first quarter of 2021 the company had positive operating leverage as our expenses declined and operating revenue increased 12% to $45 3 million from the same quarter in 2020 and increased 2% compared to the previous quarter.
Non interest income for the quarter was $4 1 million, a 41% increase from the previous quarter.
Credit card fees were the largest contributor however analysis and the international fees were up for the quarter as well.
Net interest income for the quarter was $41 1 million a slight decrease from the previous quarter.
Resulting in a net interest margin of 3% on a fully taxable basis.
However, our larger balance sheet prevented margin compression from having a more significant impact on earnings.
Comparing Q1 2021 to Q4 2020.
The 12 basis point decline in NIM can be attributed to a 21 basis point decline in earning <expletive>et yields partially offset by a nine basis point reduction in cost of funds.
Earning <expletive>et yields were negatively impacted from an average of nearly 250 million in excess liquidity.
Created from strong deposit growth and loan and investment prepayments during the quarter.
We expect this low yielding cash on our balance sheet to trend downward in Q2.
From the loss of seasonal deposits and increasing loan and investment activity.
The changing balance sheet mix.
P. P P loan activity and a few nonrecurring items contributed to the remainder of the NIM change.
The investment portfolio continues to present challenges as well as opportunities.
As cash on the balance sheet accumulated during the quarter and elevated prepayments continued with.
We grew our investment portfolio of holdings by over $31 million.
The yield for taxable Securities has declined 28 basis points from 199% in Q4.
217%.
In Q1 of 2021, as we purchased nearly $40 million of the mortgage backed securities that went on the books at rates lower than the existing taxable bonds.
As expected with the recent increase in long term rates the.
Portfolio of surrendered some of it's unrealized gains, but we remain at nearly the.
They remain nearly $30 million.
Noninterest expenses for the quarter were $22 8 million of reduction of 900000 from the previous quarter.
And noninterest expense to average <expletive>ets declined to one 6%.
Our <expletive>ets per employee increased again to a company high of $18 million.
The current run rate of operating expenses reflects of the efficiencies achieved from the staff reductions we made in Q3 2020.
The current level of operating expenses should help stabilize our efficiency ratios in the low 50% range, making further improvements dependent primarily on growth in operating revenues.
For the quarter, we posted 54% efficiency ratio down from 55, 1% in Q1 2020.
And $58 one per cent for the entire 2020 year <unk>.
And we cross below 50% on a non-GAAP basis.
Our return on average <expletive>ets continues to improve climbing the 0.84% and would have exceeded 1% with pre COVID-19 provisioning levels.
As illustrated the overall investment portfolio yield compared to our cost of funds.
Continues to be a very positive contributor to after tax ROA and Roe metrics.
Total stockholders' equity on March 31 was $629 million.
Our capital ratios remained strong and we continued to repurchase shares in the first quarter under a previously disclosed.
The program.
We repurchased 88497 shares of our stock during the quarter at an average price of 11 86.
The resulting in tangible book value per share of $12 16 at quarter end.
Although not required of banks our size. We've recently performed some portfolio level of credit stress testing that indicated cross first remains well capitalized under the baseline and the harshest economic scenarios published by the Federal Reserve.
And certain pandemic scenarios created by the Oxford economics of economists.
Because earnings have continued to improve we have been able to grow <expletive>ets over $900 million in the last 12 months.
And our common equity tier one and total risk based capital ratios have remained relatively flat.
Overall, we feel good about the financial results for the quarter and look forward to continued improvement.
I would like to turn the presentation over to Randy for a detailed discussion of credit at this time.
Thanks, Dave and good afternoon, everyone.
<unk> mentioned, we continued to see improvement in our key credit metrics in Q1, including nonperforming and cl<expletive>ified <expletive>ets during the quarter cl<expletive>ified <expletive>ets decreased almost 6% to $269 million, resulting in the cl<expletive>ified the capital ratio plus allowance of 38.2.
2%.
Although our cl<expletive>ified loan totals remained higher than our target we have seen significant improvement since the peak in Q3 of 2020 and expect to see continued improvement in this total in the upcoming quarters.
Our allowance for loan and lease losses to total loans ended Q1 at a very strong 179%, excluding PPP loans, we maintained our higher reserve level. Despite the elevated charge off activity reported in Q1.
We are expecting to convert two cecil at the beginning of 2022 and are currently running parallel models.
The elevated charge offs in the past several quarters are related primarily to a few energy and C&I transactions and we do not expect this elevated level of charge offs to continue in the coming quarters.
Our nonperforming <expletive>ets decreased 12% during Q1 to $68 9 million or 1.15% of total <expletive>ets, primarily due to the upgrade of of lodging properly property negatively impacted by Covid.
At the end of Q1, approximately 43% of our N P. A's are related to energy exposure.
As of the end of Q1, 44% of our cl<expletive>ified <expletive>ets are energy related.
We will continue to evaluate these loans in the upcoming quarter as many of our semi annual borrowing base Redetermination are set to occur in May and June.
We expect these redetermination of <unk> with the higher commodity price environment, and the receipt of Q1 financials, showing the impact of higher prices to our borrowers to result in significant positive grade migration in the portfolio.
In Q2 and Q3.
Since we remain on the incurred loss model for reserves. We expect this improved grade migration to also positively impact the required reserve level held against the energy portfolio.
As expected our COVID-19 related loan modifications are coming to an N and.
And we have very few remaining modifications in the portfolio.
Most of our borrowers are back to making regularly scheduled payments.
I'm proud of how our bankers have continued to work with our clients to navigate the pandemic.
As the vaccination rate increases government stimulus continues to support consumers and businesses. The overall economic growth rate accelerates and energy prices continue to stabilize we expect to see material improvement in our nonperforming <expletive>ets cl<expletive>ified <expletive>ets.
Charge off activity and reserve levels in the coming quarters.
I look forward to answering any questions you might have shortly.
This wraps up our prepared remarks, and now I'll turn it back over to the operator to begin the Q&A portion of the call.
Thank you.
You asked the question you'll need the press star one on your telephone.
Sorry your question first the pankey please.
Please standby, while we compile.
Okay.
The first question comes from Michael Rollins.
And James Your line is now open.
Hey, good afternoon, everyone how are you.
Michael Michael.
Hey, guys Congrats Dave on the retirement of announcement first of all.
I wanted to start on loan demand last quarter, you guys had talked about kind of ex PPP growth in kind of the 6% to 8% range I believe and this quarter was.
Some pretty decent growth what are you what are you hearing and seeing from your borrowers you know a lot of ex has talked about of pick up in the back half.
Your outlook is obviously, a little bit of a little bit stronger than most of them can you talk about what your customers are saying and maybe where youre seeing demand and maybe just what competition is like thanks.
Yes, Thanks, Michael.
We are seeing a pickup in demand I think our port our pipeline continues to grow.
I would say competition is fairly fierce for high quality credit.
And you know, that's resulting in driving our loan yields down and yeah.
Yeah. So the key is not to compromise on credit quality and.
But we're continuing to see.
Continued growth and a.
A variety of different areas.
On the real estate side, we still see a lot of demand in industrial in particular multifamily continues to be strong.
And then on the on the commercial side.
Yeah, we're seeing some some opportunities in the <unk> space that continues to be performing very well.
And are.
You're seeing some health care opportunities.
So and then we continue to see a lot of activity from some of our larger family office clients.
And a variety of different industries.
Okay.
What's on where line utilization is and is that going to be a pickup of the growth and then it also looks like the.
The syndications in the shared national credits were down about $26 million this quarter.
Do you expect those balances to come down and be a headwind to any sort of growth.
You know we're not.
The decline in those balances will be just kind of in the normal course.
You know from our line utilization standpoint, it's been fairly consistent.
As the PPP loans process, and we get through that it wouldn't surprise me if we see some increased line utilization.
But we're not planning on that for growth.
What we're focused on on new opportunities.
Okay, and maybe finally from me just on the on the margin Dave.
Talked about keeping the margin above 3% it looks like that might be a challenging feat just given the amount of liquidity that you and others have seen and obviously some of the securities purchases.
We'll help but just any sort of outlook.
Outlook as we think about the NIM moving forward. Thanks.
Yes first of all Michael Thanks for the nice comment.
Margin is.
Challenging right now.
We did bounce back just a little bit from the $2 90.
Six of level that we were at in Q4.
We do think we can hold above 3%, although not by very much and the next quarter the.
The liquidity on our balance sheet is what's doing the most damage to our margin we figure that had about <unk> 16.
16 basis point impact on margin this quarter, because we were carrying balances overnight funds and balances on average between about $250 million on average that we really werent getting any real earnings off of at the fed.
So we do think that's going to drop down in Q2 that should help our NIM calculation.
And then the PPP activity is somewhat irregular, but we think it'll be some it'll be consistent in the second quarter compared to what it was in the first quarter. So.
Optimistically I think we can stay above 3% in the next quarter and then take a look at that point.
On down the road.
Alright, Thanks for taking my questions Congrats again, Dave.
Thanks, Mike.
Thank you. Our next question comes from Jennifer Dunbar with choice of Securities. Your line is now open.
Thank you good afternoon.
Good afternoon, Jeff.
Alright.
Do you think the net charge offs.
Levels are kind of moderate.
Your periods here.
What kind of level that you're targeting over the near term.
So Jennifer this is Randy.
We do feel like we had some.
Unique charge off activity in the last several quarters.
Isolated to certain areas of the portfolio and we don't expect that to continue and as I said in my comments, we do expect that to moderate.
We have an internal target that we try and keep you know charge offs below.
On a go forward basis.
And so we would think that level would normalize somewhere sub 30 basis points.
Thanks, so much.
Thank you. Our next question comes from Brady Gailey with <unk>.
Line is now open.
Hey, Thank you good afternoon, guys, Hey, Brady.
So the cost of deposits is still around 50 basis points.
I was just wondering how much room do you think you have.
Continue to move that lower and as that of real.
You can kind of protect the margin.
There's no question that we can the Brady. This is Dave No question. We can continue to try to protect margin on the cost of funds side.
We are aggressively looking at further reductions this quarter.
In our cost of funds, we think reasonably we can see five to 10 basis point reduction in cost of funds for the quarter.
We remain a little high in relation to.
Our peers out there.
But there are a couple of of.
Buckets of funding that we've got that we may just.
Adjusted aggressively and if we lose some of the money we have plenty of liquidity to handle that so I think five maybe on the low side 10 on the high side it would be reasonable for Q2.
And of reduction further reductions.
Okay.
Alright, and then back on loan growth.
This year, you'll be working through the PPP.
There are a lot of your clients probably half of excess cash at the after work here until they need.
The borrowed money from you guys, but once you get through this year you look the next year and beyond.
Do you think is the right growth level per crosshairs.
Yeah. Good question.
We would expect to see of 10% to 15% loan growth and in a normal environment and.
And then you know that.
Not only from our existing markets, but were hopeful to have some expansion over the next couple of years. The it will allow us to to continue to drive that growth.
Okay.
And then you mentioned the reactive on the buyback.
Thank you repurchase of about 90000 shares.
Not a ton of stock repurchase I think about $1 million last quarter.
In the fourth quarter, you did about $6 million in.
The stock is still even today of one one times tangible.
You are north of 10% TCE. So maybe just talk about your appetite.
The in buybacks kind of.
In size this year at this level.
Well, we have the authority to do up to $20 million of buyback for the year, we felt like.
It will probably go on most of the year, we do put some limits on price for that to try to be strategic.
But I think.
We will continue to pick up stock I'm hopeful we can get all of that done we haven't looked to do any block trades at this point in time. So we're just taking it one transaction at a time.
But our objective would be to fully execute that plan in 2021, Yeah, Brian will continue to be methodical on our stock buyback, but our hope really is that our stock started trading at a better multiple.
So we.
Well, we're out of the market.
Yes totally.
So Dave is this your last call or will you be of around in July.
Brady I don't know I think of the process is underway right now I suspect there'll be around somewhat in some form in July but.
If it goes as way the way the board and Mike wants I think there'll be a new new voice on the phone pretty soon.
I really seeing some of you all of this past year this pandemic kind of the.
And as closeout virtually.
Alright, Thats finished well ahead.
Great Good luck.
Congrats on the successful career with great working with you during the IPO.
Yes, let's keep in touch.
Well thank you.
Thank you. Our next question comes from Andrew Liesch with Piper Sandler Your line is now open.
Hey, good afternoon, everyone.
Andrew.
But the service charges.
The new customer account growth and deposit growth driving that is this a good run rate to build off of for overall fee income is north of $4 million. It was nice to see the.
Does that dollar amount up there.
We have had nice fee income growth.
Some of it has been a little abnormal.
Related to.
One of one customer who's who's had.
A very successful year in an industry.
Associated supporting pandemic services.
So.
So our credit card fee income and it's probably a little higher than that of all normalize out of that but.
But we do expect to continue to see.
Solid growth in our fee income, we're very very focused on it and.
You know we're focused on building, our C&I portfolio and in all of the related services that go with it.
Great.
That's helpful and then on the expense side came in nicely from last quarter and below my forecast.
This 23 five of $23 million of good run rate to use going forward.
Yes, I think currently the $23 million is a pretty good run rate.
Looking to make some investments as we've talked to you before in the technology space and maybe in some expansion.
Which will have an impact on that and we will start adding a few people back to the.
Payroll, but the 'twenty three 'twenty 4 million dollar run rate is pretty reasonable at this point in time.
Great to hear thanks for taking my questions and Dave Good luck and congrats on the retirement of announcements.
Thank you Andrew.
Thanks, Andrew.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Our next question comes from Matt Olney with Stephens. Your line is now open.
Great. Thanks for taking the question.
I want to follow up on that last point on operating expenses.
David Thank you mentioned that $23 million to $24 million of the good.
Run rate I think last time, we talked about.
To a per day growth for the year of that base of 91, and a half million dollars from last year.
Does that still hold or are you now thinking differently on that outlook for the full year.
We all kind of depends on what our balance sheet does you know I think the one 6%.
Our ratio is a pretty good ratio and if we grow our balance sheet, obviously, that's going to track with that growth.
Overall for the year, 6% to 8% looks reasonable at the beginning of the year, we probably.
At this pace were going to be a little less than that I would think.
But there are investments, we'll make in the second half of this year that.
Could drive it up a little bit more so I don't see it getting much beyond that level, unless we expand into a new market and make an acquisition of whatever.
Okay.
Okay. That's helpful and then going back to the margin discussion.
Core loan yields.
The take out the impact of PPP, if I'm doing my math right it looks like the loan yields.
Totally flat quarter to quarter.
Right and anything unusual in those numbers just trying to get a feel for what direction that's going ahead.
That's probably not too far off the the P. P. P impacted margin of about 3% negatively this quarter.
So you can kind of take a look at that at the loan yields that would be at a higher number if youre looking at just the loans in our earning <expletive>et pool.
We have we have actually show a little bit of a.
Yeah pretty flat I guess on if you're excluding PPP on the loan yields I don't have that exact number in front of me.
Any color on where new loan yields have been coming out of more recently.
Yes, Matt This is Randy it's Mike said theirs.
There's a lot of liquidity in the market and Theres a lot of competition for the the better transactions and so the loan yields are theres a lot of pressure on loan yields but.
I'm proud of our bankers for really sifting through and finding no transactions that not.
Not only meet our risk tolerance, but our.
Profit tolerance and are doing a good job of building floors into transactions as well so definitely some negative pressure there, but I think overall, it's holding fairly well.
Okay. Thank you and just lastly on the PPP side, Dave I think you mentioned.
About $2 4 million.
The fees recognized in the <unk> and that's the expectation that you hold that.
Of that.
<unk> did that did I.
Catch that right and any other color you can give beyond that for the remaining $5.9 million of fees get to be.
A discussion of my corporate Treasurer of this morning, and a little bit of of bad on that.
He thinks it will be just a little bit less than Q1 during the quarter and the.
The forgiveness is.
Not certain at this point, how much of that will get in the quarter, but because of that accelerates those fees.
So that would be a nice level, if we can get to that level of you might want to look a little bit below that.
Looking so far this far into the into April fees continue to be.
The accelerated pretty quickly.
And just one more the.
The tax rate was a little bit lower than the night.
Speaking of this quarter, what kind of color you can give me from the tax rate from here.
You know we've come in load of the last couple of quarters on our effective rate I still think we use the 21% level pretty much for all of our internal modeling here that may give you a little a little room to work with its been 20 or under I think for the.
As we look back the last few quarters.
Okay.
That's all from me congrats on the quarter and Dave Congrats on the other announcement.
Thanks, Matt.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Matt for closing remarks. Thank.
Thank you for joining us on the call today and as a quick reminder of this call can be accessed via replay on our website and as always you can contact me with any follow up questions. You might have again, we appreciate your interest and of our investment in our company and thank you for taking time with US This afternoon take care.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Yeah.
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Yes.