Q3 2021 Crossfirst Bankshares Inc Earnings Call

October 19, 2021

Hello. Good morning. This is the operator, today's conference will start momentarily.

Please stay on hold. Thank you.

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Hello, and welcome to the third quarter 2021 earnings conference call for Crossfirst Bankshares. All participants will be in listen only mode. During the presentation. Please note. This event is being recorded.

Welcome to the third quarter 2021 earnings conference call off our cross first bancshares.

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 0. I would now like to turn the call over to Heather Worley Director of Investor Relations. Please go ahead.

Signal a conference specialist by pressing the Starkey followed.

Israel.

I would now like to turn the call over to Heather Worley Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for the Crossfirst Bankshares 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. All forward-looking statements are as of the date of this call. And we do not assume any obligation to update or revise them.

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.

All forward looking statements are as of the date of this call.

Followed, but 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, Dan Kraus, CFO, and Randy Rapp, Chief risk and Chief Credit officer. At the conclusion of our prepared remarks, our operator, Sunny will keep a question and answer session. At this time I'd like to turn the call over to Mike Maddox. Thank you for the introduction Heather, and welcome to the team. We're excited to have you here with us.

And we're Mike Maddox, President and CEO, Dan Kraus, CFO, and Randy Rapp, Chief risk and Chief Credit officer at the conclusion of our prepared remarks, our operator, Sunny will decide which I keep a question and answer session. At this time I'd like to turn the call over to Mike Maddox.

Thank.

They are your 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 and credit quality.

And credit quality.

Partly 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 a 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.

Prove meters about our company as well as the progress we have made in several key areas.

As many of you know Crossfirst 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 five plus billion dollars bank.

The company.

It has grown substantially over the past 14 years to become a five plus billion dollars 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 connection.

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.

It 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 and 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 Crossfirst 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.

Size 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 then beyond include these tenants of continued growth through attracting and retaining the best talent. Leveraging our strong capital position and continuing to serve our clients and communities.

And then beyond include these tenants have 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.

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Two in 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.

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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 in a highly engaged team committed to serving our clients and executing on our plan.

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.

<unk> 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.

<unk> have hired four strong experienced producers.

We are pleased with the activity the team has already generated in 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.

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.

And 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 exploration 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.

Our strategies in response to this issue.

The Kansas City, and Dallas Fed reports, both show moderate 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.

Higher than pre pandemic levels.

Which should provide future growth opportunities in the markets we serve.

Real estate and the high growth, Arizona, and Texas markets, particularly in construction remains exceptionally strong despite large construction backlogs due to labor and supply shortages.

<unk> is exceptionally strong despite large construction backlogs due to labor and supply shortages.

Which are limiting sales and escalating costs.

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.

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're 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 Clouse, who will start on slide eight.

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 diluted earnings per share for the quarter.

Markets and continued to generate a consistent level of earnings at $21 million, which equates to 41 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.

<unk> 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 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.

Turn 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.

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 declines 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.

<unk> 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.

Our.

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 noninterest bearing accounts.

Interest expense declined sequentially by over 10% to $5.5 million due to mix shift changes toward demand deposits and lower yield products. CD is repricing lower. And modest rate reductions.

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 noncore funding.

Because of our current balance sheet structure, our loan to deposit ratio remained high for the quarter at 95%.

Our loan to deposit ratio remained high for the quarter at 90.

5%.

Historically, we have used wholesale and institutional funding to help support our growth initiatives, which has allowed us to being 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.

95.

Net interest margin increased to $3 two zero percent on a fully taxable basis compared to $3 one 2% 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 noninterest 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 bully 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.

That's driven by some realized gains on bond sales and we had an increase in credit card fees compared to the second quarter CRU.

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.

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.

Noninterest expenses for the quarter were $24.0 million, $1 million lower than second quarter after adjusting for the unusual compensation costs last quarter.

<unk> 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.

Is normalizing from the lower levels incurred during the pandemic as business development activities return.

While our GAAP 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 multiyear trend in efficiency ratio improvement and an overall focus on managing expenses prudently, while still supporting growth.

Expense.

This is the continuation of a multiyear 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.

<unk> G 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 bully gain last quarter, and a resulting greater mix of taxable income in the third quarter.

Now last quarter, and a resulting greater mix of taxable income in the third quarter.

Our capital ratios remained 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 and 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.

<unk> 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 improvement.

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.

<unk> over to Randy for a more detailed discussion of credit and more color on the asset impairment and the release of reserves.

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 our restructured C&I credit discussed in Q3 of 2020.

We gained additional clarity into the final resolution of our restructured C&I credit discussed in Q3 of 2020.

Part of the restructure on this nonperforming loan in Q4 2020 was a partial charge down in exchange of a portion of debt for equity and the restructured borrower.

The price of 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.

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 nonperforming assets continued to decline ending the quarter at 0.92% of total assets due primarily to upgrades within our C&I portfolio payoffs of nonperforming loans and an Oreo liquidation. NPAs have decreased 36% during 2021, and we continue to work diligently with our clients with a goal of lowering our NPA ratio closer to historical levels. 51% of nonperforming assets are in the energy sector and are being positively impacted by the higher commodity prices.

Zero point, 92% of total assets due primarily to upgrades within our C&I portfolio payoffs of nonperforming loans and Oreo liquidation.

Npa's have decreased 36% during 2021, and we continue to work.

Diligently with our clients with a goal of lowering our NPA ratio closer to historical levels.

<unk>, 51% 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.

<unk> continued improvement in our classified loan totals.

<unk> 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.

Most 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.

Portion you 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.

<unk> 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 nonperforming 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 and 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 continue 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 Cecil in January of 2022.

And 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 Cecil 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.

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.

On your Touchtone phone.

If you are using speakerphone, please pick up your handset before pressing the keys.

Your question. Please press Star then the number.

At this time, we will fall, we will pause momentarily to assemble the roster.

Okay.

Our first question comes from Brady Gailey from KBW.

Brady Gailey from <unk>.

Hey, Thanks, good morning, guys.

Good morning, Greg.

It was great to see loan growth reemerge here at 8% linked 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.

Considering Phoenix is coming online Briscoe is coming online it seems like.

Maybe you guys could do double-digit loan growth from here, but just wondering your thoughts on the loan growth outlook.

The loan growth outlook.

But we continue to see steady growth in our pipeline. Part of the net growth is related to a little bit of a slowdown in charge of our portfolio.

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Part of the net growth is related to a little bit of a slowdown and in charge of our portfolio.

But certainly we're starting to pick up momentum in Phoenix in Frisco.

Dallas continues to see a great deal of opportunity so we're really confident about our ability to grow loans organically.

The opportunity so we're really confident about our ability to grow loans organically.

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.

Add some great talent that is going to help us do that.

Okay.

And a nice step down here in expenses linked quarter. Is 24 million are 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?

<unk> expenses linked quarter.

Is 24 million are good.

Kind of base run rate to think about from here and maybe.

Throw on top a little bit of expense creep just as Youre building out those two new markets is that the right way to think about the expense base.

Hi, Brady, it's Ben I. I would actually expect we'll have something in the range of 3% to 5% expense grow noninterest expense growth in fourth quarter and thats almost exclusively due to talent investment. Closer to 25.

I would actually.

Expect we'll have something in the range of 3% to 5% expense grow noninterest expense growth in fourth quarter and thats almost exclusively due to talent investment.

Closer to something closer to 25.

And then finally for me 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?

Yes, I would expect it to be pretty close to 2021 percent going forward. Yeah Q2 was a little.

Odd because of the bold, but 2021 is a good rate going forward, Brady.

Okay, great. Thanks, guys.

Thanks, Greg.

Our second question comes from the line of Jennifer Dunbar.

Through these securities.

Hi, good morning.

Good morning.

Just wondering with energy prices higher now, there's a greater appetite for those types of loans going forward. And I also wanted to take your temperature on new markets outside Rick or Phoenix are there any emerging opportunities over the near term? Thanks.

With energy prices higher now, there's a greater appetite for those types of <unk>.

Going forward at all.

Yeah.

Take your temperature on new.

New markets outside.

Side, Rick or Phoenix are there any emerging opportunities over the near term. Thanks.

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 is nothing in the near term that we have teed up.

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.

Yes.

Valuation.

A number of different markets. There is nothing in the near term that we have teed up but.

We will 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 in Frisco, and getting those markets up to scale. And future expansion of a prudent we don't want to get our expense out of line.

Building, our infrastructure in Phoenix in Frisco, and getting those markets up to scale and.

Future expansion of a prudent we don't want to get our expense.

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Out of line.

Randy I know if you want to add on energy yeah. Thanks, Mike Hey, good morning, Jennifer.

I'd just add as Mike said that over time, we've message, we want to drive that percentage down closer to 5% at the same time, we are seeing some some nice opportunities in the market to balance risk and yield and you're seeing.

Much tighter structures lower advance rates higher hedging percentages.

Quicker repayment and so I think that given the lift in commodity prices and the improvement in structure in the market. We are actively looking at new opportunities in that space.

Yeah.

Thanks, so much.

Thank you Barbara.

Okay.

Our next question comes from Michael Rose with Raymond James.

Hey, good morning, everyone. Thanks for taking my questions.

Good morning, Michael Good loan growth Hi, good morning.

So obviously, a decent step down on energies with just kind of mentioned this quarter, but core C&I was up pretty strong can you just talk to utilization levels how much that was from maybe some of the newer producers there are markets that you've entered into.

That was from maybe some of the newer producers there are markets that you've entered into.

And then. Just as we look forward, what's the commitment?

Just as we look.

Forward, what's the what's the commitment.

Expectations, growth in commitments this quarter and then as we move forward do you have any sense for what we'll see as we as we look ahead? Thanks.

What we'll see as we as we look ahead. Thanks.

Well growth in the portfolio, a large part is still being driven out of Dallas. And Kansas City, we're starting to see new opportunities in Phoenix.

In the portfolio.

A large part is still being.

Driven out of Dallas.

Dallas.

And.

Kansas City, we're starting to see new opportunities in Phoenix.

But still those two markets are driving slow growth a lot of it is C&I.

Utilization rates.

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 continued kind of consistent loan growth with what you saw in the third quarter.

This is Randy.

Okay.

Hey, Michael This is Randy I would just add that.

We are seeing really good pipelines in the C&I space as we feel like that 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 on our commitment totals still approving lots of good new opportunities in the real estate construction space that will fund up next year.

Rates, but also.

As you saw on our commitment totals still approving lots of good new opportunities in the real estate construction space that will fund up next year.

Very helpful and maybe just switching over to deposits you guys had a really nice have remixed the deposit book here over the past.

Last.

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 to drive positive operating leverage next year, but any sort of sense of what initial kind of 2022 NII guidance could look like? Thanks.

For I assume youre going to shoot to drive positive operating leverage next year, but any.

Okay.

Sort of sense of what initial kind of 2022 NII guidance could look like thanks.

Hey, Michael, it's Ben I might just talk to the deposits and the margin first.

And the margin first.

We do think that there'll be some pressure top-line on margin, pricing for loans continues to become more and more competitive.

We're doing the right pricing for loans continues to become more and more competitive.

But the bottom half of the equation is we do have a fair amount of continued repricing of course theres 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.

Our fourth quarter, which will allow us to drive cost of funding down a little bit there may be.

Maybe a basis point of annualized pricing room left on deposits, but not 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.

The CRO that as we think about continuing to get our loan engine restarted here.

<unk> just to add on the deposit side, we're laser-focused on growing our DDA base. And our team has done a fantastic job focusing on that this year and we will continue to Randy talk to.

And our team has done a fantastic job focusing on that this year and we will continue to Randy talk to.

Again, 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 we're 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 that's starting to pay dividends.

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 for those markets out of the seven.

Are in Texas.

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 would move your headquarters down there at some point, but in all seriousness. It just seems like there is a lot of flags planted there.

A lot of flags planted there.

How should we read that as we as we think about the opportunity set moving forward?

Yes.

Michael, I like living in Kansas City, and that's achieved southwest flight to Dallas, so.

Any big buildings anytime soon but Texas is a focus of ours clearly if you look at the map, we think we have more opportunity to expand there.

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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. So that is a big part of our future no question.

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. So that is a big part of our future no question.

We're trying to identify markets that we believe are.

Our outgrowing the normal markets, but if you look at Phoenix Denver.

Nashville, some of those markets outside of Texas.

Our 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 and.

So that's why the math looks that way and with our branch light technology focused business model.

We can manage markets remotely.

Markets from from.

Remotely.

But our strategy on new markets is really driven by people.

Just a matter of finding the right talent and I think Phoenix is a great example of a market, where we were able to recruit a great leader, who has been able to begin to build a terrific team and so that's really the core of how we think about expansion.

Understood.

I guess the.

Cowboy's Jersey that Heather asked where youre not going to warehouse.

Thank you.

Yes.

We'll drive our stock price at all where a cowboy hat or whatever.

Yes.

Thanks, Paul.

Thank you.

Our next question comes from the line of Andrew Liesch from Piper Sandler.

Good morning, Thanks for taking the question.

Good morning.

Just wanted 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 what other.

Are there any other positions that need to be filled how are you feeling with.

With the team right now.

Our management team is pretty well built out.

You might see us.

Expand in Texas as we continue to.

To grow that state and.

I think it would be a reasonable expectation to see us continue to invest in talent in Texas.

Got it and Andrew that Andrew I was just going to add Thats really production revenue generation talent will be the major focus that's right.

Got it got it yeah that was my follow up then and.

And then just on the buy.

On the buyback.

The last two.

Very quickly is that kind of the same pace that you are expecting now with the newest one.

Well it depends on our price.

Andrew but generally.

<unk>.

We will try to execute that over a quarter or two or possibly three depending on what the price does.

The math is pretty simple right. Our book value I think at the end of the quarter was $12 and 79 cents, and you can see where that related in regards to our.

Price. So I think it will be fairly aggressive as the as the price hovers, where it is now and subject to move through the next couple of quarters.

Got it. Thanks, you covered all my other questions.

Sure. Thanks, Andrew.

Our last question comes from Matt Olney.

Sure Steven.

Thanks, Good morning, guys.

Good morning.

I guess, Ben you mentioned the pressure on the loan yields a few minutes ago any more color you can provide on that and specifically do you have.

The new loan yields on some of the newer loan production.

And then the second part of that is it looks like on on Slide 10, there was some noise on the three Q loan yields on the non accrual chart changes any more details behind that thanks.

Sure.

I can tell you as I said I think in my remarks.

<unk> new saw in the deck, we actually had an increase in yield in the quarter.

Versus Q2, although.

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.

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 some loans get.

Upgrade on and come off of non accrual rate, which triggered a little bit of.

Incremental recognition in the quarter is that a fair way to say that Randy.

That was attributable to several upgrades back onto performing status that impacted that.

And are there any numbers you can put behind that so we can appreciate just the level of that of that impact.

I'd probably have to do some research to give you a number unless you do Randy, but Heather and I'd be happy to follow up with you after the call.

Yes, that's fine that's fine, Okay, and then I guess.

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?

Asia 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.

In the fourth quarter, you're just saying we could see immaterial level of provision expense, along with some normal loan growth. Thanks.

Immaterial level of provision expense, along with some normal loan growth. Thanks.

Yes, Matt this Randy I'll take that so.

At this point at the end of the quarter, we feel are adequately reserved.

There aren't a lot of moving pieces into the appropriate reserve level, one being loan growth.

Sure.

Another being continued improvement in our classified assets as I said, we are still on the incurred loss model. So as we continue.

You need to see upgrades in the portfolio that will drive lower reserve levels.

And so and then the next factor it will come in as we are planning to convert to seasonal and in January of 2022. So we'll factor all that in and look at the reserve level, we certainly would not anticipate.

Next factor it will come in as we are planning to convert to seasonal and in January of 2022. So we'll factor all that in and look at the reserve level, we certainly would not anticipate.

<unk>.

Any material provision and again, we'll keep all options on the table as we worked through the quarter, including an additional negative provision.

Okay, great. Thanks, Scott.

Thank you.

This concludes our question and answer session I would like to turn the conference.

Back over to President and CEO, Mike <unk> for any closing remarks.

But again I just want to.

Thank you 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 in.

Really look forward to.

The rest of the year. So thank you all for being here and we'll talk to yourself.

Okay.

Thank you please direct any follow up calls.

Heather at cross first Dot com.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Yes.

[music].

Yeah.

[music].

Hello, and welcome to the third quarter 2021 earnings conference call them for cross first Bancshares.

All participants will be in listen only mode. During the presentation. Please note. This event is being recorded.

Should you need assistance.

Signal a conference specialist by pressing the Starkey followed by zero.

I would now like to turn the call over to Heather Worley Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us today for the cross first Bancshares third quarter 2021 earnings Conference call I'm, Heather Worley director.

These better 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.

Forward looking statements are as of the date of this call and we do not assume any obligation to update or revise them.

<unk> 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.

Alex with the SEC our.

Our speakers for the call today are Mike Maddox, President and CEO, Dan <unk>, CFO, and Randy Rapp, Chief risk and Chief Credit officer at the conclusion of our prepared remarks, our operator Sunny will facilitate a question and answer session.

At this time I'd.

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

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.

<unk> had another great quarter with $21 million of earnings.

Our results this quarter included the release of 10 million.

Million of reserves.

From continued significant improvement in credit quality.

Firstly 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 a sustained credit improvement our board approved a new share buyback.

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.

List of 2019.

The company has grown substantially over the past 14 years to become a five plus billion dollars 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.

Actor competence commitment.

<unk> and connection.

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.

Made it through the challenges of the pandemic by reinforce.

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 and 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 tenants have 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.

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.

Sure.

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.

<unk>.

Most recently this strategy strategy included the hiring of our new Chief Technology Officer, our new Chief Financial Officer.

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 in the pipeline they are building.

Investing in the right technology for our clients and organization is a top priority for cross first.

Our efforts to enhance our digital presence to 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.

We 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 carbon companies are hopeful that the exploration of the federal supplemental unemployment benefits will provide some relief.

Many of increase.

<unk> their investments and labor saving automation strategies in response to this issue.

The Kansas City, and Dallas Fed reports, both show moderate robust growth in manufacturing.

We are monitoring labor shortages and supply chain challenges.

Their survey indicated that capital.

Capital expenditure levels will be similar to last year or higher than pre pandemic levels.

Which should provide future growth opportunities in the markets we serve.

Real estate and the high growth, Arizona, and Texas markets, particularly in construction remains exceptionally strong despite large construction backlog.

Logs 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 liquids.

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 expired.

Hire experienced bankers in key growth markets.

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 Clouse, who will start on slide eight.

Thanks, Mike.

And good morning, everyone.

We had another solid quarter and continue to generate a consistent level of earnings at $21 million, which equates to 41 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.

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.

<unk> growth balanced with strategic return of that capital to our shareholders.

Quarterly return on average assets continues to improve climbing to 154% and return on average equity increased to $12, 92% of course both.

<unk> 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.

<unk> 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.

Yield was up due to that forgiveness. Despite.

Get 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.

Pleased to have driven demand deposit growth this quarter, ending the period with 22% of deposits in noninterest bearing accounts.

Interest expense declined sequentially by over 10% to $5 $5 million due to mix shift changes toward demand deposits and lower yield.

<unk> 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 noncore funding.

Because of our current balance sheet structure.

Our.

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 too.

As demand and loan growth returns.

Net interest margin increased to 320% on a fully taxable basis compared to $3, one 2% 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 noninterest 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.

Silly game.

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.

Noninterest expenses for the quarter.

<unk> 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 foreclosed asset 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 GAAP 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 multiyear trend inefficiency 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.

Quarter, due primarily to the tax exempt boley gain last quarter, and a resulting greater mix of taxable income in the third quarter.

Our capital ratios remained 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 and 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 compromised our strong capital ratios.

Overall, we feel very good about the solid financial results for the quarter and look forward to.

<unk> improvement.

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.

Thank you Ben and good morning, everyone.

In Q3, we realized continued improvement in our primary credit metrics.

<unk>.

As Ben mentioned in Q3, we gained additional clarity into the final resolution of our restructured C&I credit discussed in Q3 of 2020.

Part of the restructure on this nonperforming loan in Q4 2020 was a partial charge down.

In exchange of a portion of debt for equity and 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.

<unk>.

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 nonperforming assets.

Continued to decline ending the quarter at zero point, 92% of total assets due primarily to upgrades within our C&I portfolio payoffs of nonperforming loans and Oreo liquidation.

Npa's have decreased 36% during.

2021 and we continue to work diligently with our clients with a goal of lowering our NPA ratio closer to historical levels.

51% of nonperforming assets are in the energy sector and are being positively impacted by the higher commodity prices.

During <unk>.

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.

<unk> totals.

<unk> in the energy portfolio have been reduced from a high of $139 million in Q3 of 2000 $20 million 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 2022, 17% at the end of Q3 2020.

One 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.

Improvement in nonperforming 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 and provision expense taken in Q1 and.

Based on <unk> of 2021.

Despite the reserve release, we reported a total allowance for loan losses of $64 2 million or 151% of total loans and 156% of total loans, excluding PPP balances.

<unk> of 2022.

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.

Thank you Sir we will now begin the question and answer session.

Great 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 COVID-19.

Your question. Please press Star then the number.

At this time, we will pause fast moment already to assemble the roster.

Okay.

Our first question comes from.

Brady Gailey from <unk>.

Hey, Thanks, good morning, guys.

Good morning, Greg.

It was great to see loan growth reemerge here at 8% linked quarter annualized was just wondering what the.

The outlook is on loan growth, especially considering you know Phoenix is coming online Briscoe is coming online it seems like.

Maybe you guys could do double digit loan growth from here, but just wondering your thoughts on the loan growth outlook.

But we can we continue to see.

Steady.

Growth in our pipeline.

Part of the net growth is related to a little bit of a slowdown in churn of our portfolio.

But certainly we're starting to pick up momentum in Phoenix in Frisco.

And Dallas continue.

As to see a great deal of opportunity. So we're really confident about our ability to grow loans organically.

Our business from the 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.

Okay.

And a nice step down here.

Expenses linked quarter.

Is 24 million are good.

Kind of base run rate to think about from here and maybe.

Throw on top a little bit of expense creep just as Youre building out those two new markets is that the right way to think about the expense base.

Hi, Brady it's Ben.

Would actually.

Expect we'll have something in the range of 3% to 5% expense grow noninterest expense growth in fourth quarter and thats almost exclusively due to talent investment.

Closer.

So closer to 25.

And then finally for me 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 crossovers.

Yes, I would expect it to be pretty close to the 2021%.

Going forward, Yes, Q2 was a little odd because of the bold but.

'twenty one is a good rate going forward great.

Okay, great. Thanks, guys.

Thanks, Greg.

Yes.

Our second question comes from the line of Jennifer Dunbar.

Okay.

Through these securities.

Hi, good morning.

Good morning.

Just wondering.

With energy prices higher now, there's a greater appetite.

Those types of loans going forward.

And all that.

Take your temperature.

Sean.

Markets outside.

Phoenix are there any emerging opportunity.

The near term.

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.

We're going to be cautious there but.

As far as new markets.

We're evaluating.

A different markets there is nothing in the near term that.

<unk>, 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.

<unk>, our infrastructure in Phoenix in Frisco, and getting those markets up to scale and.

Future expansion of a prudent we don't.

Our expense.

Expenses.

<unk>.

Andy I know if you want to add on energy yeah. Thanks, Mike Hey, good morning, Jennifer.

Want to get and Youre seeing.

<unk>.

Tighter structures lower advance rates higher hedging percentages.

Quicker repayment and so I think that.

Given the lift in commodity prices and the improvement in structure in the market. We are actively looking at new opportunities in that space.

<unk>.

Thanks, so much.

Thank you Sir.

Our next question comes from Michael Rose with Raymond James.

Hey, good morning, everyone. Thanks for taking my questions.

Just wanted to thank Michael.

Space for loan growth good morning.

So obviously a decent step down.

On energies, which is kind of mentioned this quarter, but core C&I was up pretty strong can you just talk to utilization levels how much.

That was from maybe some of the newer producers there are markets that you've entered into.

And then just.

As we look forward what's the.

What's the commitment.

Expectations of your growth in commitments this quarter and as we move forward do you have any sense for.

What we'll see as we as we look at it.

Well.

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 core growth a lot of it is C&I.

Utilization rates.

Our 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 continued kind of consistent loan growth.

What you saw in the third quarter.

This is Randy.

Okay.

Hey, Michael This is Randy I would just add that.

We are seeing really good pipelines in the C&I space as we feel like that 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.

You saw on our commitment totals still approving lots of good new opportunities in the real estate construction space that will fund up next year.

Very helpful and maybe just switching over to deposits you guys had a really nice.

Have remixed 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 guys.

Shoot to drive positive operating leverage next year, but any.

What initial 2022 NII guidance could look like thanks.

Hey, Michael It's Ben I might just talk to the deposits and the.

And the margin first.

We do think that there.

There'll be some pressure top line on margin right pricing for loans continues to become more and more competitive.

But the bottom half of the equation is we do have a fair amount of continued repricing of course theres a lag as you would imagine in the deposit structure and we will continue to have some.

<unk>.

Roll off and reprice in the fourth quarter, which will allow us to drive cost of funding down a little bit there may be maybe.

Maybe a basis point of annualized of pricing room left on deposits, but not not a lot.

In regard to leverage absolutely.

<unk> our intention is to continue to grow that as we think about continuing to get our loan engine restarted here.

Just to add on the deposit side, we're laser focused on growing our DDA base and.

And our team has done a fantastic job of focusing on that this year.

Turning to Randy talk 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 we're 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 we are continuing to pay dividends.

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 for those markets out of the seven.

Start are in Texas.

Obviously, Dallas has been a good piece of the growth as we move forward, but you answered some of those other markets.

Maybe you might imply you guys would move your headquarters down there at some point, but.

In all seriousness. It just seems like there's a lot of flags pointed there.

How should we read that as we as.

But the opportunity set moving forward. Thanks.

Michael I like living in Kansas City, and that's achieved southwest flights a day or so.

If we're going to move any big buildings anytime soon but.

Texas is a focus of ours clearly if you look at the map, we think we have more opportunity to expand.

As we think then there.

There is 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. So that is a big part of our future no question.

We're trying to identify.

<unk> that we believe are outgrowing the normal markets, but if you look at Phoenix Denver.

Nashville, some of those markets outside of Texas.

Our huge beneficiaries of the exodus of people, leaving California, and going to maybe be more business friendly states and.

Moreover, we think those markets in time will provide us an opportunity to grow and.

So that's why the math looks that way and with our branch light technology focused business model.

We can manage.

Markets from from.

And so remotely.

But our strategy our new markets is really driven by people. It's just a matter of finding the right talent and I think Phoenix is a great example of a market, where we were able to recruit a great leader, who has been able to begin to build a terrific team and so that's really the core of how we think.

Fashion.

Understood.

I guess, the Cowboy's Jersey that Heather asked where youre not going to warehouse.

Thank you.

Yes.

It will drive our stock price at all where a cowboy hat or whatever it is.

Okay.

Thanks, Paul.

Thank you.

Our next question comes from the line of Andrew Liesch from Piper Sandler.

Good morning, Thanks for taking the question.

Just wanted to follow up on the.

Outlook here and you referenced hiring a new.

Technology out there obviously.

Coming on as CFO, but if you look at management what other.

Are there any other positions that need to be filled how are you feeling with.

With the team right now.

Our management team is pretty well built out.

You might see us.

Expand.

Texas as we continue to grow that state and.

I think it would be a reasonable expectation to see us continue to invest in talent in Texas.

Got it Andrew that Andrew I was just going to add Thats really production revenue generation talent will.

And in the major focus that's right.

Got it yeah that was my apology.

And then just on the.

On the buyback.

The last two.

Very quickly is that kind of the same pace that you are expecting with the newest one.

Well it depends on our price.

Andrew but generally.

We will try to execute that over a quarter or two or possibly three depending on what the price does.

The math is pretty simple right.

<unk> book value I think at the end of the quarter was $12 79, and you can see where that.

In regard to our share price. So I think we'll be fairly aggressive as the as the price hovers, where it is now.

And subject to move through the next couple of quarters.

Got it thanks, you've covered all my other questions.

Sure. Thanks, Andrew.

Our last question.

It really comes from Matt Olney with Stephens.

Thanks, Good morning, guys.

Good morning, Matt.

I guess, Ben you mentioned the pressure on the loan yields a few minutes ago any more color you can.

On that and specifically do you have the.

The newer loan.

On some of the newer loan production and then the second part of that is it looks like on on Slide 10, there was some noise.

Noise on the three Q loan yields on the non accrual chart changes.

More details behind that.

Sure.

I can tell you.

Yields I said.

In my remarks, new saw in the deck, we actually had an increase in yield in the quarter.

<unk> Q2, although.

Peel that back a little bit that had clearly slowed down at the end of the quarter and we experienced certainly more pressure in.

As of 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.

<unk>.

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 some loans get.

Upgrade on and come off of non accrual rate.

<unk> triggered a little bit of incremental recognition in the quarter is that a fair way.

I would say that Randy.

That was attributable to several upgrades back onto performing status that impacted that.

And are there any numbers you can put behind that so we can appreciate just the law.

<unk> of that impact.

I'd probably have to do some research to give you a number unless you do Randy, but Heather and I'd be happy to chat with you after the call.

Yes, that's fine that's fine, Okay, and then I guess.

Changing topics here.

Level, you mentioned the allowance ratio to 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.

In the fourth quarter, you're just saying we could see.

Immaterial level of provision expense, along with some normal loan growth. Thanks.

Yeah, Matt this Randy I'll take that so at this point at the end of the quarter, we feel are adequately reserved.

But there aren't a lot of moving pieces into the appropriate reserve level, one being loan growth.

Another being continued improvement in our classified assets as I said, we're still on the.

Fast model so as we continue to see upgrades in the portfolio that will drive lower reserve levels.

And so and then the.

<unk> will come in as we are planning to convert to seasonal and in January of 2022. So we'll factor all that in and look at the reserve level, we certainly would not.

<unk> incurred anticipate.

Any material provision and again, we'll keep all options on the table as we worked through the quarter, including an additional negative provision.

Okay, great. Thanks, Scott.

Thank you.

This concludes our question and answer.

Got it.

I would like to turn the conference back over to President and CEO, Mike <unk> for any closing remarks.

So again I just want to thank everybody.

Body for participating on the call today, we're very excited about our progress in the future and where we're headed.

We continue.

So as we 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.

Sure.

Okay.

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