CrossFirst Bankshares, Inc. (NASDAQ:CFB) Q4 2024 Earnings Call Transcript

CrossFirst Bankshares, Inc. (NASDAQ:CFB) Q4 2024 Earnings Call Transcript January 23, 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 Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in a listen only mode. [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 of CrossFirst Bankshares. Please go ahead.

Mike Daley: Good morning, and welcome to CrossFirst Bankshares Fourth Quarter and Full Year 2023 Earnings Conference Call. Before we begin, please be aware this call will include forward-looking statements, including statements about our business plans, expansion and growth opportunities, expense control initiatives, 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, Lenia, 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, and good morning. I appreciate everyone joining us today to discuss CrossFirst’s fourth quarter and full-year financial performance. Our results continue to reflect our focus on growing profitably and responsibly as we scale the strategic investments we’ve made in dynamic markets and verticals, best-in-class technologies, and experienced bankers delivering extraordinary service. We reported nearly $20 million in adjusted net income for the quarter and $73 million in adjusted net income for the year. This equates to a record full-year adjusted earnings per share of $1.47. Despite a challenging macro environment, CrossFirst had an incredible year. We closed on our Tucson acquisition, opened 2 prominent Texas locations, launched our new digital banking platform, and grew earnings by 6% on an adjusted basis for the year.

This was all in spite of a historic rise in rates that put significant pressure on margin. As I reflect on the previous year, I continue to be extremely proud of our team and the way they managed through the turmoil within our industry with a focus on serving our clients and continuing to build franchise value. Unprecedented times like these create opportunities for us to show our clients what serving in extraordinary ways really means and proves that our core strategy of building trusted relationships has long-term value. In 2023, operating revenue was a record $246 million, an increase of $35 million or 16% for the year. Total assets grew to a record $7.4 billion, up $780 million or 12% from a year ago. Our asset increase was driven by strong organic growth and deposit growth, and we continue to see growth in fee income.

We grew tangible book value meaningfully this year by $75 million or 12% without AOCI and $90 million or 15%, including the AOCI improvement. One of the most important things is that our asset quality remains strong due to disciplined credit underwriting and our overall risk management framework. We entered 2023 with a theme of optimization, to build on our solid foundation and maximize the investments we made to benefit our clients and drive operating leverage to improve profitability for our shareholders. Despite the challenging environment, our team remained focused and executed on our balance sheet optimization initiatives, drove operating leverage, and grew our capital levels, all of which contribute to long-term growth of shareholder value.

We also continue to show the health and strength of our loan portfolio, and our view into the future reinforces my belief that our diversification, our prudent underwriting, and our dynamic high-growth metro markets will continue to differentiate us. This year will mark our 5th full year as a public company. Over the past 5 years, we’ve operated through unprecedented times. We’ve all lived through a pandemic, supply chain challenges, the largest rise in inflation and interest rates for years, and a liquidity crisis. Despite the unique operating environment, we have made dramatic improvement as a company. Since our IPO in 2019, we have grown our balance sheet by $2.5 billion, or 50%, through 2023, including tremendous loan growth across our markets.

In that same period, we have made huge improvements in a number of metrics, including credit quality, with MPAs declining from 0.97% to 0.34%. Non-interest bearing deposits growing from 13% in the pre-pandemic environment to 15% today. Operating revenue growth of more than 60%, adjusted net income more than doubling, and our adjusted ROE increasing from 5.2% to 11.3%. We have worked hard to deploy the capital we raised during the IPO through organic balance sheet growth, share buybacks, and 2 successful acquisitions. Our business model has also significantly expanded and become more diverse. We have entered new high-growth metro markets such as Fort Worth, Phoenix, and Denver, and we added and expanded industry verticals to include sponsor, restaurant, and SBA.

We plan to leverage opportunities to grow efficiently by prudently managing expenses. We will continue to focus on optimizing operations, while also leveraging key technology and infrastructure investments. A great example of this is our new collaboration with Nymbus, a leading fintech company providing cloud-based banking and core services. Leveraging Nymbus’s technology platform, we intend to build out a digital offering to expand our geographic reach to more and more small- to medium-sized businesses. I am very proud of our team and very optimistic about our future. We are in a much better position today than we were 5 years ago. We have a highly experienced team of bankers who remain focused on our clients as we continue to evolve and scale our operations for the future, while enhancing franchise value.

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 Q4, we continued to show good organic loan and deposit growth while maintaining solid credit metrics. I am proud of the results the CrossFirst team delivered in 2023 against a number of challenging external factors and believe we have the bank well-positioned for 2024. In Q4, we reported total loan growth of $182 million, resulting in a growth rate of 3.1% for the quarter. Growth in the quarter was balanced primarily between C&I and commercial real estate. We continued to focus on increasing loan yields, and the average loan yield on new production in the quarter was a strong 8.43%. For 2023, we reported total loan growth of $755 million, or 14%, including the Tucson acquisition.

The organic loan growth rate for 2023 was 12%. The increase was primarily attributable to a $371 million increase in CRE outstandings, a $315 million increase in C&I and owner-occupied real estate balances, and a $41 million increase in energy exposure. Loan growth for the year was broad-based across our markets and lines of business, led by the Dallas-Fort Worth, Kansas City, and Phoenix markets and specialty lines of business. At year-end, average C&I line utilization increased to 52%, which is above the historical usage percentage rate of 47%. This increase is partially attributable to our focus on right-sizing line commitments. Portfolio churn decreased and is now below the historical average level. We expect portfolio churn to increase slightly over the next several quarters, primarily in the commercial real estate portfolio, as the interest rate environment stabilizes, bringing more clarity to expected cap rates and permanent 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 $214 million, or 3.5% of the portfolio. On Slide 9, you can see the remains’ good diversity within each of those portfolios, with the highest CRE property type, industrial, accounting for 21% of total CRE exposure, and the largest industry segment in C&I, now being restaurant, at 11% of C&I exposure and 3.7% of total loans. As you will recall, we launched a restaurant finance lending vertical in 2022 that gained significant traction in 2023. This group is led by a veteran banker in the space, and typical clients are experienced mid-size multi-unit quick serve operators. In the CRE portfolio, total office exposure is now $292 million, relatively flat compared to $294 million at the end of Q3, and is 4.8% of total loans.

The average office loan size remains $7 million, and the largest is $25 million. The average loan-to-value is 60%, and the majority of the portfolio is suburban Class A and B office. Approximately half of the portfolio is set to mature in the next 2 years. However, 74% of these maturities are loans with floating rates, which have been repricing up through this rate cycle. We feel confident in the commitment of our sponsors to these projects and do not anticipate upcoming maturities to be a catalyst event towards defaults. As we have previously stated, we have followed our strongest sponsors to other markets, but the majority of this exposure is in our footprint, centered in North Texas, Kansas City, and Colorado. Moving to credit highlights on Slide 10.

For Q4, we reported non-performing asset to total asset ratio of 34 basis points, which is down from the 50 basis points reported at the end of Q3. The decrease was primarily due to the past due C&I credit, we discussed on the third quarter call that resolved in early October as expected. The remaining non-performing loans are primarily C&I with one fully secured commercial real estate transaction. ORE balances remain at 0. Classified assets to capital plus combined reserves ended Q4 at 14.8%, which is relatively flat with the 14% at the end of Q3 and remains at an acceptable level. At year end, classified loan totals are comprised 65% in the C&I space, 22% in commercial real estate, and 8% in owner-occupied real estate. Classified loans in the energy portfolio are negligible.

For the quarter, we reported net charge-offs of $1.9 million, resulting in a charge-off rate of 12 basis points on an annualized basis and 9 basis points on a trailing 12-month basis. Charge-offs for the quarter were primarily attributable to 1 C&I credit. At quarter end, we reported an allowance for credit loss to total loan ratio of 1.2%, which is flat compared to the end of Q3. The combined allowance for credit loss and reserve for unfunded commitments totaled 1.3%, which is also consistent with the prior quarter. Provision was slightly higher than Q3 due to loan growth and charge-off activity during the quarter. With a total ACL of $73.5 million, our current ACL to non-performing loan ratio is 296%. We remain highly focused on maintaining good credit metrics moving forward.

Turning to Slide 11. For Q4, deposits increased 3% to $6.5 billion, up $159 million from the previous quarter. Non-interest-bearing deposits decreased slightly during the quarter to $990 million, and now represent 15% of total deposits. For the year, total deposits increased $840 million, or 15% including the Tucson acquisition. Organic deposit growth was $675 million, or 12%. We are pleased with the overall performance of the company in 2023 against a challenging environment; and in 2024, we’ll continue to focus heavily on deposit generation, deposit mix, fee income growth with treasury management and credit card products, and loan growth on transactions with accretive yields and fees. We plan to continue heightened monitoring of the loan portfolio looking for negative trends, while adherence to our established underwriting guidelines will also remain a top priority.

We are fortunate to be located in high-growth, high-quality markets and believe we will continue to benefit from the investments we have made in talent, new markets, and lines of business over the past several years. 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. GAAP net income this quarter was $17.7 million, or $0.35 per diluted share. Adjusted net income was $19.6 million, or $0.39 per diluted share. Both GAAP and adjusted net income improved from the prior quarter with a 3% increase in net interest income and lower non-interest expenses, which more than offset a modest increase in provision expense. On a full-year basis, we achieved $66.7 million in earnings, or $1.34 earnings per diluted share. On an adjusted full year basis, earnings were $72.8 million, or $1.47 earnings per diluted share. As Mike noted, this is an all-time high for us in EPS on both a reported and adjusted basis, as we focus on driving profitable growth. Quarterly adjusted return on average assets was 1.07%, and adjusted return on average equity was 11.9%, both increasing nicely from Q3.

We realized good organic balance sheet growth in the quarter, as Randy outlined, and we are pleased to see profitability improving as our prior expense management actions and continued positive operating leverage were evident in the quarter’s results. Net interest income expanded this quarter with a balanced contribution from both higher yields and higher average earning assets. The yield on earning assets increased 16 basis points to 6.63% due to loan repricing as well as higher yields on new loans and no interest accrual adjustments this quarter. Better yields on our investment securities portfolio also contributed. Average earning assets increased $134 million compared to the prior quarter, with most of the net increase from loan growth.

Turning to Page 12. Our total cost of deposits was 3.74% for the quarter, increasing 15 basis points. Our total non-maturity deposit beta against the entire rate cycle through the fourth quarter remained at 57% in line with our expectations, and the pace of increase in our cost of deposits moderated in the fourth quarter. Our deposit base remained consistent with the prior quarter in terms of diversification and composition. Our loan to deposit ratio remained at 94%. We also decreased borrowings during the quarter and kept wholesale funding flat as a percentage of assets. Fully tax equivalent net interest margin expanded 4 basis points, compared to the prior quarter to 3.23%. Our core NIM, adjusting out noise from accrual impacts has remained stable in the low $3.20s since the second quarter, and we continue to believe this is the bottom of the trough.

Our balance sheet is only slightly sensitive through any potential rate moves in 2024, especially through the less than 100 basis point ramp scenarios, up and down, as 69% of our earning assets reprice or mature in the next 12 months. We expect margin to be in a range of $3.20 to $3.25 for 2024, with the most pressure earlier in the year and some potential for expansion under our assumption of 2 rate cuts impacting the last half of 2024. Given this backdrop, our expectation for loan and deposit growth in 2024 is in a range of 8% to 10%. Non-interest income was $4.5 million for the quarter, including the bond loss of $1.1 million. The remaining small decrease compared to Q3 was due to a decline in mortgage activity and lower service charges, as well as some tax incentives and other gains in the third quarter that did not reoccur.

We did continue to see growth in our credit card program. On a year-over-year basis, excluding the bond loss, we grew non-interest income by 26%, or $4.5 million, with contributions from treasury, credit card, and SBA loan sales being the largest drivers. These will be continued focus areas of growth in 2024. Moving to Slide 13. Adjusted non-interest expense decreased $1.3 million, compared to the prior quarter, due primarily to lower compensation. We remain highly focused on our efforts to drive additional efficiencies and gain operating leverage, and we will continue our focus on cost control in 2024. Our adjusted efficiency ratio improved 3% to 52% this quarter. Our headcount declined in the quarter, as we completed our integration efforts for the Tucson acquisition.

Notably, we drove non- interest expenses down to 1.92% of average assets, which is now below the level prior to our 2 acquisitions. We expect non-interest expenses to be in a range of $36 million to $37 million per quarter in 2024, with compensation rising in Q1 due to the reset of taxes, benefits, and incentives, as well as merit increases. Our tax rate was 21% for the quarter, and we expect the tax rate to remain in a range of 20% to 22% in 2024. On Slide 14, our liquidity remains strong, consistent with the prior quarter at 34% of assets. We have significant liquidity of approximately $2.5 billion from on and off-balance sheet sources. We have continued to increase the liquidity in our investment portfolio with an ongoing moderate shift in the ratio of munis that we were able to accelerate this quarter with a modest restructuring of the portfolio.

We expect the transaction to be accretive in 2024 and result in less than a 1 year earn back. It also improved our risk-based capital ratio due to deployment of the proceeds into lower risk-weighted assets. We continue to evaluate all of our options to improve the yields on our earning assets. 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 achieved our goal of reaching an 11% total risk-based capital ratio ending the year at 11.2%. We also increased our CET1 ratio to 10%. We intend to continue to focus on building capital from here, balanced with our focus on shareholder return. In 2024, with continued strong earnings growth, we will evaluate strategic return of capital to shareholders, which we believe can be achieved while still building capital.

In summary, 2023 was a very successful year for CrossFirst. We continue to increase profitability and grew capital, all while positioning our balance sheet for continued success in the future. Operator, we are now ready to begin the question-and-answer portion of the call.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Brad Gailey with KBW.

Brad Gailey: Yes, it’s Brady. So maybe just to start with the net interest margin guidance, I think, I heard Ben talk about maybe the margin being under pressure early in 2024 and then seeing expansion towards the latter part of 2024. Should we expect the NIM to contract a little bit from the 4Q level into early ’24? Or do you think the 4Q NIM is the bottom?

Ben Clouse: Brady, we think it will be pretty flat in the beginning of the year. And as I said, with some potential for a little bit of expansion with a couple rate cuts toward the end, we, like most others, are assuming a June, September, and December cut, the December, not really having much impact on results.

Brad Gailey: Okay. And Ben, I think, I heard you say at this point you guys are close to rate neutral. So, if we see more or less rate cuts, will that impact this NIM guidance by much?

Ben Clouse: Well, more cuts and faster cuts would be an upside for us. You can see on the sensitivity graph there, we have a little bit of liability sensitivity. The other component going — 2 other components going into that, of course, are our deposit mix has a huge impact on our NIM. And as Randy said, that’s been pretty stable in the quarter. We also have a couple of very modestly sized on-balance sheet derivatives, 1 on the deposit side, 1 on the loan side. The deposit side is in the money, the loan side is out of the money. It’s pretty long-term focused. It’ll provide a little bit of pressure in the beginning of the year as well.

Brad Gailey: All right. And then finally for me, just on capital, you got to the targets that you guys laid out. You didn’t buy back any stock in 2023. It sounds like you’re maybe opening the door for buybacks this year in 2024. I know the stock is sitting right at 1x tangible book value. So, should we expect some buybacks this year?

Ben Clouse: Yes, Brady, I think we’ll evaluate our ability to continue to return some money to our shareholders. Buybacks are certainly an option. We still have plenty of authorization there to execute on. And we believe our earnings are stable and are going to continue to grow. We do want to continue to build our capital levels from here, but we think we have room to do that as well as return some money to our shareholders.

Operator: The next question is from Michael Rose of Raymond James.

Michael Rose: Just a couple of follow-up questions on the margin first. I know that if I look at the down 100 basis points, it went from about 40 bps to about 160 bps Q-on-Q. What strategies do you guys have in place to maybe increase that if you’re planning to? And just what actions should we think about as we contemplate at least a couple of cuts in your guidance as we think about the year?

Mike Maddox: Michael, this is Mike. I might just — in a down rate scenario, we feel really good about our balance sheet. We have a really good percentage of our deposits that are indexed that’ll move quickly. And we will aggressively cut deposit rates at a rate quicker than the 57 beta, Ben talked about on the way up. And as you know in our modeling, we model the same beta on the way up as the way down. And I just — I think our balance sheet will react a little more favorably in a down rate environment. So, Ben is taking a conservative approach. I mean, I feel good about our margin. I feel really good about the rates at which we’re putting new loans on the books. And our teams are doing a good job with our deposit growth. So we’re hopeful that we’ve seen the bottom of margin, and we may start to see a little bit of expansion.

Ben Clouse: Yes. Michael, I might just add a couple things. Mike is correct. We’re about 25% indexed. So that will absolutely help us significantly on the way down. We continue to get really good pricing on new loans. Again, in our targeted range of 8% to 10% balance sheet growth, we believe the pricing on that will continue to be good. For the quarter, on new loans, we remain in the 8.4%, 8.5% range generally on the portfolio. So that will help as well. And our mix continues to be really good. We remain right around 70%, 30% variable fixed, but we skew a little bit more variable on new lending that we are doing, which helps us as well.

Mike Maddox: Yes, Ben brings up a good point. I mean, growth is really important. And if we can grow 8% to 10%, we’re putting newly priced assets on the books. We believe we can keep our funding costs flat. That ought to help us expand margin this year.

Michael Rose: Very helpful. And just 1 other question, Ben. I think you guys had about $10 million in purchase accounting accretion remaining at the end of the third quarter. And I think the accretion for the quarter in the third quarter was $650,000. Can you just give us an update on what that was for the fourth quarter and what the schedule accretion at least is for 2024?

Ben Clouse: Sure, Michael, you were correct about $650,000 last quarter, about $450,000 this quarter with a remaining balance of $9.4 million that generally then is spread over a 3 to 4 year period is our current assumption. And of course, influenced by any accelerated payoffs or refinancing that might occur in that time period.

Michael Rose: Okay, helpful. And then maybe just finally for me, you guys had a step down in service charges this quarter that was maybe a little bit greater than I was expecting, just given the trajectory over the past, 3 or 4 quarters. Anything in there of note, any changes that you guys made and, any sort of expectations for fees as we think about ’24?

Ben Clouse: Yes, Michael, that was really an anomaly, not anything related to the base rate, and I’ll let maybe Randy expand on it. But we intend for to continue to drive some significant growth in fee income in 2024 as we take a look at pricing and some of the things Randy’s team is doing in the sales area.

Randy Rapp: Yes, Michael, it’s Randy. It has been said, we do expect the income to increase in ’24. Over the last 12 months to 18 months, we’ve made significant investments, not only in technology process and also in talent. And we feel like, there is a real opportunity to grow our treasury fees and also our credit card income. And we did push through a price increase on our treasury products at the beginning of this year, the first one we had made in several years. And so we think the combination of the increase in price and increase in volume will improve those fees in ’24.