Yahoo Finance CrossFirst Bankshares, Inc. (NASDAQ:CFB) Q1 2024 Earnings Call Transcript
CrossFirst Bankshares, Inc. (NASDAQ:CFB) Q1 2024 Earnings Call Transcript April 16, 2024
CrossFirst Bankshares, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the CrossFirst Bankshares First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Daley, Chief Accounting Officer and Head of Investor Relations. Please go ahead.
Mike Daley: Good morning. Before we begin, please be aware this call will include forward-looking statements, including statements about our business plans, growth opportunities, expense control initiatives, cash requirements and sources of liquidity, capital allocation strategies and plans, and our future financial performance. These comments are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Our forward-looking statements are as of the date of this call and we do not assume any obligation to update or revise them except as required by law. Statements made on this call should be considered together with the risk factors identified in today's earnings release and our other filings with the SEC.
We may also refer to adjusted or non-GAAP financial measures. A reconciliation of non-GAAP financial measures to GAAP financial measures can be found in our earnings release. These non-GAAP financial measures are not meant to be a substitute for or superior to financial measures prepared in accordance with GAAP. Our presentation will include prepared remarks from Mike Maddox, President and CEO of CrossFirst Bankshares; Randy Rapp, President of CrossFirst Bank; and Ben Clouse, CFO of CrossFirst Bankshares. At the conclusion of our prepared remarks, our operator Cindy will facilitate a Q&A session. At this time, I would like to turn the call over to Mike, who will begin on Slide 7 of the presentation, available on our website and filed with our earnings release.
Mike?
Mike Maddox: Thank you, Mike. Good morning, everyone, and thank you for joining us to discuss CrossFirst’s first quarter financial results. Our company had a solid first quarter with strong organic loan and deposit growth, stable credit quality, expansion of noninterest income, and an increase in earnings. We continue to benefit from operating in dynamic markets with experienced talent. This combination provides steady growth as we execute our strategy focused on serving our clients and driving enhanced shareholder return. Total assets grew to a record $7.5 billion with loan growth at 8% on an annualized basis. Net income was $18.2 million or $0.36 earnings per share. We continue to build capital with improvement in our ratios and growth in book value despite negative AOCI movement.
These performance metrics demonstrate our ability to generate sustainable profits for our shareholders and are incredible people or drivers behind our success. To that end, I am thrilled to announce that last week our company was honored by Gallup with the prestigious Don Clifton Strengths-Based Culture Award for the second year in a row. This award recognizes companies with workplace cultures that put the strengths of leaders, managers, and employees at the core of how they work every day. Receiving this global award for the second year in a row is a true reflection of our collective efforts in fostering a culture that values individual strengths, collaboration, and continuous growth. It is also a testament that when you focus on the relationship between employee contributions and the overall business outcomes, you will build a culture of engaged employees, which leads to an increase in performance.
Despite a challenging macro environment, we continue to see good new business opportunities in our markets and verticals. This has allowed us to continue to have a moderate level of loan growth, while maintaining a focus on quality deals and appropriately managing risk. This strategy has helped us navigate uncertainties in the market and ensure the stability of our loan portfolio. Commercial real estate continues to be an area of heightened focus for us and our industry. As a result of our strong clients and economically robust markets, we are not seeing deterioration in this portfolio. Our investor office portfolio predominantly comprised of suburban and single tenant properties located in our footprint continues to remain strong and perform as anticipated.
Randy will cover more details on the loan portfolio in a moment, but I do want to highlight that the increase in our CRE portfolio is in large part due to the two strategic acquisitions we made over the last 18 months. We are now predominantly fulfilling prior loan commitments and are focused on reducing our concentration in CRE back toward historic levels. We had nice organic growth in client deposits this quarter led by Kansas City, Oklahoma, and Phoenix markets despite the continued highly competitive environment. We are also happy with the year-over-year growth in non-interest income, fueled in part by the development of our newer markets and verticals. Specifically, SBA and treasury fees were a significant part of the noninterest income expansion.
The growth in loans, deposits, and noninterest income reflects our commitment to providing secure and reliable banking services to our clients and building trusted relationships within our markets and verticals. We will continue to focus on deposits and non-interest income opportunities and have aligned our bankers' incentive plans and goals to drive that focus. This historic rising rate environment has been challenging for financial institutions, putting pressure on net interest margin, earnings, and capital. Our highly variable balance sheet has benefited us, which Ben will cover in more detail shortly. I remain confident in our ability to navigate the evolving financial landscape and optimistic about our future due to the strong markets we operate in.
We have a highly experienced team of bankers focused on optimization and efficiency as we continue to scale our operations, while enhancing franchise value. As we look ahead, we remain committed to our strategic goals and will continue to focus on delivering value to our clients, shareholders, and communities. We intend to continue to grow prudently, efficiently, and profitably by optimizing operations, maximizing key technology investments, while continuing to manage expenses. Thank you for your continued support and trust in CrossFirst. And now, I'd like to turn the call over to our President of CrossFirst Bank, Randy Rapp.
Randy Rapp: Thanks, Mike, and good morning, everyone. In Q1, we reported loan and deposit growth in line with our expectations, while increasing fee income and maintaining solid credit metrics. For the quarter, total loan growth was $121 million resulting in a growth rate of 2% for the quarter or 8% on an annualized basis. Primary contributors to growth in the quarter were commercial real estate, C&I, and owner-occupied real estate. We continue to focus on increasing loan yields, and the average loan yield on new production in the quarter was a strong 8.58%. Loan growth for the quarter was broad-based across our markets and lines of business, led by the Dallas-Fort Worth, Denver, and Kansas City markets, and the energy and restaurant finance lines of business.
We continue to gain momentum in our SBA line of business, which contributed to fee income in Q1. At quarter end, average C&I line utilization was 51%, which is slightly above the historical usage percentage rate of 48% and consistent with the line utilization rate in Q4. Portfolio churn decreased and remained below the historical average level. Although portfolio churn has been low, we expect this churn to increase significantly over the next several quarters, primarily in the commercial real estate portfolio. We have heard from many of our CRE clients that they intend to sell or take stabilized properties to the permanent markets in the coming quarters based on acceptable cap rates and long-term fixed interest rates. Our loan portfolio continues to remain balanced with 44% in commercial real estate and 44% in C&I and owner-occupied real estate.
Energy outstandings were $221 million or 4% of the total portfolio. On Slide 8, you can see there remains good diversity within each of those portfolios with the highest CRE property type, industrial, accounting for 23% of total CRE exposure and the largest industry segment in C&I being restaurants, at 10% of C&I exposure and 3.7% of total loans. In the CRE portfolio, total office exposure is now $291 million, which is flat compared to the end of Q4 and is 4.7% of total loans. The average office loan size remains $7 million and the largest is $25 million. The average loan to value is 61% and the majority of the portfolio is suburban Class A and B office. As previously stated, approximately half of the portfolio is set to mature in the next two years.
However, 75% of these maturities are loans with floating rates which have been repricing up through this rate cycle. We currently have one $13.9 million office transaction graded special mention, which has the support of a strong guarantor and the remainder of the portfolio has a pass grade. We have followed our strongest sponsors to other markets, but the majority of the exposure is in our footprint centered in Texas, Kansas City, and Colorado. During Q1 total CRE commitments decreased slightly from $3.3 billion at year end 2023 to $3.2 billion, and unfunded CRE balances decreased from $734 million at year end 2023 to $595 million at 3/31/2024. Total CRE outstandings increased from $2.57 billion to $2.66 billion, led by fundings in the industrial and multifamily portfolios.
As previously mentioned, we anticipate increased churn in the CRE portfolio, which will lower total CRE exposure in future quarters. Moving to credit highlights on Slide 9. For Q1, we reported a non-performing asset to total asset ratio of 27 basis points, which is down from the 34 basis points reported at the end of Q4. The decrease was primarily due to a reduction in 90-day past due C&I transactions, and the remaining non-performing loans are primarily C&I transactions, with the largest exposure being under $5 million. The ORE balance increased to $5.3 million during Q1 due to a foreclosure on a previously identified non-performing loan secured by residential lots and residences in Austin, Texas. We believe our carrying value is appropriate based on a current appraisal and healthy Austin residential market.
Classified loans to total capital plus combined reserves ended Q1 at 15.8%, which is up slightly compared to 14.8% at the end of Q4 and remains at an acceptable level. At the end of Q1, classified loan totals are comprised of 71% in the C&I space, 19% commercial real estate, and 9% owner-occupied real estate. Classified loans in the energy portfolio are negligible. At the end of Q1, we reported an increase in past due transactions, which is primarily attributable to some administrative delays at quarter end, and we expect this figure to return to historical levels in future quarters. For the quarter, we reported net charge-offs of $1.5 million, resulting in a charge-off rate of 10 basis points on an annualized basis and 8 basis points on a trailing 12-month basis.
Charge-offs for the quarter were primarily attributable to several small C&I credits and the foreclosed credit previously mentioned. At quarter end, we report an allowance for credit loss to total loan ratio of 1.2%, which is flat compared to the end of Q4. The combined allowance for credit loss and reserve for unfunded commitments totaled 1.28%. The slight decrease in total reserves compared to Q4 is due to a significant reduction in unfunded commitments driving less reserve. Provision expense of $1.65 million was lower than the Q4 provision due to lower loan growth and lower charge-off activity during the quarter. The provision to charge-off ratio was 113%, with a total ACL of $74.9 million, our current ACL to non-performing loan ratio is 499%.
As always, we remain highly focused on maintaining good credit metrics moving forward. Turning to Slide 10. For Q1, deposits increased 1.5% to $6.6 billion, up $96 million from the previous quarter. Noninterest-bearing deposits decreased slightly during the quarter to $954 million and now represent 14.5% of total deposits. We reported minimal growth in time deposits for the quarter and higher growth in our other interest-bearing deposits. We are pleased with our loan growth, overall portfolio diversification and credit metrics and expect our CRE exposure to moderate over the coming quarters. We remain focused on deposit growth and mix and have made adjustments to our incentive program to enhance the rewards attributable to deposit generation.
Fee income also remains a focus area, centered around SBA, treasury fees, and credit card revenue. We plan to continually, heavily scrutinizing the existing loan portfolio, looking for negative credit trends, and are being disciplined, adhering to our underwriting standards for new exposure. We are fortunate to be located in markets with high job growth and economic expansion. I will now turn the call over to Ben to cover the financial results in more detail. Ben?
Ben Clouse: Thanks, Randy, and good morning, everyone. As Mike said, net income this quarter was $18.2 million or $0.36 per diluted share. This was an increase of about 3% from last quarter or $0.1 of EPS. Lower provision expense and higher noninterest income drove the increase and were partially offset by increased non-interest expenses. Net interest income was nearly flat despite one less day this quarter. Quarterly return on average assets was 1.0% and return on average common equity was 10.4%. We realized good organic balance sheet growth in the quarter, as Randy outlined, and we are pleased to see continued profitability improvement in the quarter's results. Interest income expanded this quarter with a balanced contribution from both higher yields and higher average balances, partially offset by one less day.
We have a long-term rate hedge to protect against declining rates with a modest notional amount that became effective this quarter. Slide 11 outlines the change in our net interest margin this quarter. The underlying yield on earning assets increased 16 basis points, although the hedge offset that by 7 basis points, resulting in an earning asset yield of 6.72% this quarter, with expansion due to loan repricing, as well as higher yields on new loans. Better yields on our investment securities portfolio also contributed. Average earning assets increased $80 million compared to the prior quarter, primarily due to loan growth. Our total cost of deposits was 3.87% for the quarter, increasing 13 basis points. Our total non-maturity deposit beta against the entire rate cycle through the first quarter remained at 57%, in line with our expectations, and the pace of increase in the cost of deposits continued to moderate.
Our deposit base remained consistent with the prior quarter in terms of diversification and composition. Our loan to deposit ratio was up slightly to 95%. Borrowings were slightly down from the prior quarter, and we kept wholesale funding flat as a percentage of assets. Fully tax equivalent net interest margin was down 3 basis points compared to the prior quarter to 3.20%, in line with our expected range. We expect our NIM to improve modestly with any rate cuts this year, and we remain slightly liability sensitive. For the quarter, yield on assets slightly outpaced the increase in cost of funds with the hedge causing the slight decline overall from last quarter. Our NIM has remained stable in the low 3.20% since the second quarter of 2023. We have worked diligently to position our balance sheet to perform in the current higher for longer rate environment, while preparing for potential rate cuts.
As we shared last quarter, our expected margin is in a range of 3.20% to 3.25% and assumes two rate cuts this year. Fewer cuts would put our margin at the lower end of this range. I also want to provide some additional color on our balance sheet positioning. Our earning assets continue to be primarily variable at 65% reprice or mature in the next 12 months. As Randy outlined, our loan growth was right in line with the lower end of our expectation this quarter, and we continue to expect loan and deposit growth in 2024 in a range of 8% to 10%. On the liability side, 26% of our client deposits are indexed and will automatically move down with any Fed rate movements. In addition, we have short duration broker deposits of 15%. Our CD portfolio duration has continued to shorten as we incentivize clients to move into six and nine month products and we have 900 million of client CDs that mature in the next 12 months.
As we renew CDs, the expected pressure to margin continues to narrow. Finally, we entered into a rate hedge, as I mentioned, a number of quarters ago to offset the loan sensitivity. And while we have had to overcome the impact on net interest income, given the lack of Fed rate actions, the hedge is performing as we expected. Noninterest income was $5.6 million for the quarter, expanding from last quarter, which included the bond portfolio restructuring loss. On a year-over-year basis, noninterest income grew 26%, with contributions from treasury, credit card, and SBA being the largest drivers. These will be continued focus areas of growth in 2024 supported by targeted pricing increases in treasury products. Moving to Slide 12. Noninterest expense increased $2.5 million this quarter compared to the prior quarter, due primarily to compensation as expected.
The main drivers of compensation were returning to full incentive accrual and the reset of benefits and taxes at the beginning of the year. Our headcount is nearly flat, being up four since year end. Expenses were slightly above our guidance this quarter due to a benefits true up and REO cost and we expect to have a run rate right around $37 million per quarter. We remain highly focused on our efforts to drive additional efficiencies and gain operating leverage in 2024. Our tax rate this quarter was consistent at 21% and we expect the rate to remain in a range of 20% to 22% this year. On Slide 13, our liquidity remains strong, consistent with the prior quarter at 33% of assets, we have significant liquidity of approximately $2.5 billion from on and off-balance sheet sources.
On Slide 14, we continue to advance our goal of building capital this quarter as we saw moderate asset growth, strong earnings, and a continued decline in unfunded commitments. We intend to continue to focus on building capital from here, balanced with a focus on shareholder return. In the first quarter, with continued strong earnings, we restarted share buybacks after pausing through all of 2023. We repurchased 112,000 shares at a weighted average cost of $13.10, compared to tangible book value per share of $13.70 at quarter end. We believe we can continue to achieve our goal to build capital, while dedicating a portion of our earnings to shareholder return through modest buybacks at a price below book value. In summary, we started 2024 with strong earnings, great organic growth, and continued advancement of our strategy.
Operator, we are now ready to begin the question-and-answer portion of the call.
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