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CrossFirst Bankshares, Inc. (NASDAQ:CFB)
Q3 2019 Earnings Call
Oct 21, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CrossFirst Q3 2019 earnings call. [Operator instructions] I would now like to hand the conference over to your speaker today, Director of Investor Relations Matt Needham. Thank you. Please go ahead, sir.

Matt Needham -- Director of Investor Relations

Welcome, and thank you for joining us today on our first-quarterly earnings call as a publicly traded company. On the call today are George Jones, president and CEO of CrossFirst Bancshares; Dave O'Toole, chief financial officer of CrossFirst Bancshares; and Mike Maddox, president and CEO of CrossFirst Bank. As a reminder, a telephonic replay of this call and our earnings release will be available on our website for an extended period of time. Before we begin, let me remind everyone on this call may contain certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

We caution investors that actual results may differ materially from the expectations indicated or implied in our forward-looking information. We provide a comprehensive list of risk factors in our SEC filings, which I highly encourage you to review. Any forward-looking statements speak only as of today, and we undertake no obligation to up them -- update them, except as required by applicable securities laws. Reconciliations of non-GAAP financial measures to the nearest comparable GAAP measures have been included in the release, and all earnings per share metrics discussed today are provided on a diluted earnings per share basis.

I'd now like to turn the call over to George Jones.

George Jones -- President and Chief Executive Officer, CrossFirst Bancshares

Thank you, Matt, and good afternoon, everyone. I'd like to start by thanking everyone for their time this afternoon while we discuss our third-quarter results. I'll take just a moment before we do that and tell you that in Dallas, we had a pretty significant tornado last night, and a lot of North Dallas was affected, and a lot of damage. Fortunately, as far as we can tell, there was no injuries and no deaths.

But there was some fairly severe damage in terms of structure. Fortunately, we were quite -- our location was quite a long way from that and we had absolutely no damage or no effect here at CrossFirst Bank in Dallas and we'll pray for the people that had a lot of damage in North Dallas. Thanks a lot. Again, we were excited to have such strong shareholders investing in our company despite the difficult market conditions we experienced during the initial public offering.

I'm going to start this afternoon by covering a few key highlights for the quarter, then, Dave will provide additional detail on our financial results, and Mike will then go into more depth regarding our loan portfolio and credit to wrap up our prepared remarks prior to our Q&A session. As you've seen in our earnings release, our teams produced record results for the third quarter of 2019, and we are on track for the best year in the company's history. For the third quarter, we delivered a net income of $10.4 million or $0.21 per diluted share and year-to-date net income of $29.2 million or $0.61 per diluted share. Year-to-date, we have achieved 3 times more net income from the same period in 2018.

We continue to deliver strong annualized double-digit balance sheet growth and our year-to-date loan and deposit ratio loan, and deposit growth is already 19% and 14%, respectfully. Our financial results reflect, again, increased efficiencies, strengthened quarter-over-quarter earnings, and continued validation of our management team and a business model that delivers excellent performance. We achieved an efficiency ratio below 55% during the third quarter, as our company continues to grow operating leverage. The efficiency ratio was impacted positively by a couple of one-time events.

Dave will get into those specifics for you. Our noninterest expense to average assets was 1.82%, and we achieved an assets-to-employee ratio of $13 million per employee. Our teams are executing on a strategy to control hiring and focusing on key areas where we need resources to build our organization with great bankers. This allows us to continue to grow into our fixed infrastructure and allocate our resources to the highest and best return on investment.

The loan portfolio remains diversified and we have seen some improvement in overall asset quality. Our credit metrics are better than the second quarter of 2019, as our nonperforming assets and classified assets are trending lower. We'll try to answer all of your questions regarding our previously disclosed one-off nonperforming asset but may not be able to give you all the details you'd like because we're still reviewing and restructuring the credit. We are taking a measured and conservative approach in our management of this particular loan.

Lastly, our capital position remains strong after our IPO and our management team is very focused on growing and leveraging our capital in an efficient manner. Our company crossed over $600 million of equity in the third quarter with leverage and risk-based ratios of 12.6% and 13.9%, respectively. With that, I'd like to turn over the call to Chief Financial Officer Dave O'Toole for a more detailed discussion of the financial results. Dave?

Dave O'Toole -- Chief Financial Officer

Thank you, George, and good afternoon to everyone. For the third quarter of 2019, our financial results were positive, we reported 0.89% return on average assets and a 7.58% return on equity. Year-over-year results were also favorable. During the quarter, we increased tangible book value per share by $0.61 from earnings, an increase in the unrealized gains of our bond portfolio, and the tangible book value accretion from the stocks sold in our initial public offering.

We experienced some net interest margin compression during the quarter but our company continues to have strong growth in earning assets that helped mitigate some of the impact from the declining rate environment. Net interest income continued to grow, reaching almost $36 million, representing a 2.6% increase on a linked-quarter basis, but a 24% increase from the same quarter in 2018. During the third quarter, our tax-equivalent net interest margin declined from 3.35% to 3.24%, however, our year-to-date margin of 3.35% remains within a 3.25% to 3.50% band that we have maintained over the last five years. Much of the margin compression as a result of short-term timing differences in our asset/liability rate movements.

Loan yields declined 13 basis points and interest-bearing deposit costs decreased just seven basis points on a linked-quarter basis, mostly due to the timing of the adjustments. Loan yields moved downward from LIBOR adjusting with the market ahead of the FOMC rate cuts. While our deposit adjustments were timed with the FOMC decisions. At the end of the quarter, we had $1.1 billion in loans indexed to LIBOR and $1.2 billion in loans indexed to prime rate.

We continue to shorten the duration of our deposits to take advantage of declining rates and the majority of our deposit growth came from variable rate money market accounts. Additionally, we anticipate a significant number of time deposits will reprice downward in the next two quarters, creating a positive impact to margins. Average deposits for the quarter -- for the third quarter of 2019 grew 5% from the second quarter of 2019 and 32% since the third quarter of 2018. The company also chose to not renew $67 million of broker deposits that matured during the quarter.

During the quarter, our available for sale securities portfolio increased $28 million on a linked-quarter basis. The securities purchased were $49 million at an average tax-equivalent yield of 3.06% and included approximately $20 million to replace principal payments on mortgage-backed CMOs and called securities. The investment portfolio yield declines were from a combination of lower-reinvestment yields and higher-prepayment speeds on mortgage-backed securities. Non-interest income increased $2 million in the third quarter of 2019 or 171%, compared to the same quarter of 2018 and $1.5 million or 92%, compared to the second quarter of 2019.

As you review our non-interest income, you will notice a significant quarter-over-quarter increase in swap fees. The back-to-back swap program started in 2018 and has grown to become a material piece of our non-interest income. Historically, when we recorded swap fee income, the recognized income was partially offset by a credit valuation adjustment to account for credit -- for counter-party credit risk. Due to increased materiality and stronger historical information with the types of loans wanting to hedge rates, we took a closer look with our credit personnel into the credit valuation assumptions and process.

We concluded that the credit exposure was partially mitigated in underwriting so the full CVA was unnecessary. This change in methodology resulted in a one-time reversal in the quarter, totaling approximately $800,000 before tax. The $1.1 million of swap fees recorded in the third quarter used the new methodology. Non-interest expense for the third quarter of 2019 increased $1.3 million or 7% compared to the third quarter of 2018, and decreased $800,000 or 4%, compared to the second quarter of 2019.

Non-interest expense for the quarter was well managed. As George indicated, our efficiency ratio was lower for the third consecutive quarter. We've continued to manage our pace of hiring and the measurement of incentive compensation relative to performance for the year. Consequently, salary and benefits expense was down slightly from the second quarter in 2019, and on a comparable year-to-date basis with 2018.

We expect to continue gaining operating efficiency and harvesting the well-recognized benefits of a branch-light strategy. During the quarter, we received an approximate 650,000 regulatory assessment credit from the FDIC, lowering regulatory fees for the quarter and year. Some of our volume-based expenses will continue to rise as we grow, but we will continue to manage our costs with the objective of enhancing profitability and efficiency. I would like to turn over the call now to the CEO of CrossFirst Bank Mike Maddox for a more detailed discussion regarding our loan portfolio and asset quality.

Mike?

Mike Maddox -- President and Chief Executive Officer,

Thank you, Dave. As Dave mentioned, our goal is to continue generating positive operating leverage. At the same time, we entinue -- to continue to invest in our people and grow the company in a profitable way. Talent and people are how we have been successful over the years, and we want to continue hiring the best people in our industry.

Our management team is extremely focused on retaining the talent we have and bringing in high-caliber bankers to our organization. I'd like to move on to discuss our loan portfolio and asset quality. We believe our underwriting standards and processes remain strong. During the quarter, we increased average loans 4% versus the second quarter of 2019 and 40%, compared to the same quarter end in 2018 despite having $204 million in payoffs in the third quarter.

In Q3, we funded $367 million in loans to replace and grow the overall portfolio by $163 million. Many of the payoffs that occurred in the quarter were larger credits. We had a number of customers that sold their companies and completely pay down their borrowings. Our portfolios in our more developed markets typically experienced the largest amount of churn in the portfolio, and our teams have done a fantastic job of finding new opportunities to mitigate the payoffs.

We have continued to see customers in the real estate market look for long-term fixed-rate opportunities, which has contributed to the increase in the back-to-back swap activity that Dave talked about. The largest contributors to our third-quarter growth was a balanced combination of commercial and industrial loans and real estate projects. Moving on to asset quality. As George mentioned, our classified and nonperforming assets are trending down, and we finished the quarter with a classified-to-capital ratio of 13%.

We provisioned $4.9 million to support the continued loan growth and increase the specific reserve to our previously identified nonperforming credit. Again, it is really an attribute to the strong team that we have built here to achieve record levels of net income this quarter and be able to increase our provisioning. Our past dues increased for the quarter, mainly from administrative rollovers and the larger one-off nonperforming credit that we are in the process of monitoring and working through. At the end of the quarter, the overall loan loss reserve was 1.18% of loans compared to 1.24% in the second quarter of 2019.

Lastly, we charged-off two previously identified and disclosed nonperforming credits. One of the credits was a legacy energy credit we have been working through since early 2015 and the other credit was a problem commercial industrial credit. Thank you again for joining our call today. And as we mentioned earlier, our full results and financial metrics are included in the earnings release.

This wraps up our prepared remarks. And now, I'll turn it back over to the operator to begin the Q&A portion of our call. Thank you.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Brady Gailey with KBW. Your line is now open.

Brady Gailey -- KBW -- Analyst

Hey, good afternoon, guys.

Dave O'Toole -- Chief Financial Officer

What's up, Brady.

Brady Gailey -- KBW -- Analyst

So, maybe we can start with the net interest margin, it's nice to see deposit costs come down a little bit this quarter. You know, loan yields came down more so we did see some NIM compression. How do you think the net interest margin trends from here?

Dave O'Toole -- Chief Financial Officer

Brady, this is Dave. We didn't get to see the full benefit of the second -- the second Fed adjustment during the quarter kind of occurred at the end of September. With that adjustment, we were pretty aggressive in adjusting our deposit rates. Actually, more than the amount of the Fed adjustment.

So we think the fourth-quarter NIM will stabilize somewhat until we get to that large pool of CDs that are out there that need to roll over in the fourth quarter and the first quarter of next year. We could see some additional compression, but I don't think it will be all that much, and depending upon loan growth during the quarter. But I'm optimistic that we will be able to hold pretty close to the band that we have continued to try to shoot for.

Brady Gailey -- KBW -- Analyst

All right, is that it was nice to see swap income be so strong, a little over $1 million. Is that -- would you consider that the new run rate? Or was that just a really nice quarter in 3Q and going forward, it should fall off that 1:1 in run rate?

Dave O'Toole -- Chief Financial Officer

That could be a high quarter for us, but I think, we will continue with a very strong run rate. We've got some transactions that are currently in the process for the fourth quarter. I haven't really determined what the swap fee will be on those. So, I would expect swap fees to run close to that number, maybe not quite at $1 million a quarter.

Brady Gailey -- KBW -- Analyst

All right. And then last for me, the assessment credit that you got from the FDIC. I think you said it was $650,000.

Dave O'Toole -- Chief Financial Officer

Right.

Brady Gailey -- KBW -- Analyst

Is that all of it or will you have any of that assessment that could be realized going forward as well?

Dave O'Toole -- Chief Financial Officer

Our best estimate is we should get a little over $1 million of total credit out of that change in the assessment calculation. So, there could be as much as another $500,000 that will come going forward.

Brady Gailey -- KBW -- Analyst

OK. But the timing of that is on the -- or will it be in 4Q?

Dave O'Toole -- Chief Financial Officer

I don't think it will all be in the fourth quarter. I believe it will be -- I think it will come out over the next two quarters, Brady.

Brady Gailey -- KBW -- Analyst

OK. All right, great. Thanks for the color guys.

Operator

Thank you, and our next question comes from Michael Rose with Raymond James. Your line is now open.

Michael Rose -- Raymond James -- Analyst

Hey, good afternoon, guys.

Dave O'Toole -- Chief Financial Officer

Hi, Michael.

George Jones -- President and Chief Executive Officer, CrossFirst Bancshares

Hey, Michael.

Michael Rose -- Raymond James -- Analyst

Hey, maybe we could just go back to the margin. It looks like you guys had some accelerated premium amortization this quarter on the muni book. What was the -- do you have a sense for what the impact was this quarter from the premium am in basis points?

Dave O'Toole -- Chief Financial Officer

Michael, I don't have an exact number, but clearly, we did have some accelerated premium amortization on our mortgage-backed portfolio and probably on some of the munis. You know, the impact was probably the change in the yield of the portfolio during that period, but I don't have a dollar amount for you.

Michael Rose -- Raymond James -- Analyst

OK.

Dave O'Toole -- Chief Financial Officer

I can certainly get that for you.

Michael Rose -- Raymond James -- Analyst

Yeah, no problem. And then maybe just as a follow-up, you know LIBOR is down again this quarter and the odds of a rate cut in October are pretty high. So, in reference to Brady's question about kind of stabilizing within the band that you referenced earlier, does that include a potential rate cut either in October or December?

Dave O'Toole -- Chief Financial Officer

Yeah, we do anticipate another rate cut this year, two rate cuts is probably outside of what we're expecting at this point. We're continuing to look at our deposits and trying to determine the pools that we can bring down. Should the Fed move here in the next couple of weeks, it is our intent to move our higher-yielding money market accounts down with those adjustments, kind of on a one-for-one basis or possibly even greater than that. As you know, as deposits were going up, we were moving pretty quickly within rate increases, so we're trying to stay on track on the way down.

Michael Rose -- Raymond James -- Analyst

Yeah, just to be clear, the assumption for a rate cut, is that in October, you're assuming? Or are you assuming December?

Dave O'Toole -- Chief Financial Officer

Well, you know, in our modeling it was in December. But as -- just in the last quarter, as circumstances have changed, obviously, it looks like there's a high likelihood it could occur this month. So, there could be some difference in our numbers based on that 60-day difference in time frame.

Michael Rose -- Raymond James -- Analyst

OK, that's helpful. And then just on the loan growth this quarter, it looks like the originations were pretty strong, but you had, obviously, pretty high level of pay downs. As we move forward, I mean, would you expect paydowns to be at elevated levels just because rates are coming down? I would assume so, but would love any color and commentary on kind of the outlook for loan growth in the next couple of quarters. Thanks.

Dave O'Toole -- Chief Financial Officer

Yeah, Michael, we had an unusual situation in the third quarter, we actually had five customers that sold companies. That contributed over $90 million worth of paydowns of credit. We don't anticipate that that will continue to happen. So, if you also -- if you take away the credit that we sold to participants.

You know, we grew the portfolio from a production standpoint, about 5.5%. We believe we'll continue on a pace in that range.

George Jones -- President and Chief Executive Officer, CrossFirst Bancshares

Michael, this is George. On -- more on your question. We see both in Kansas City and in Dallas, significant fundings between now and the end of the year accelerated to a certain extent. So, I think Q4 is going to be pretty strong for loan growth.

Michael Rose -- Raymond James -- Analyst

OK, that's helpful. And maybe just one more for me, just a housekeeping question. So, the other non-interest income line, I know that bounces around from quarter-to-quarter, but anything that's kind of one-time issue there or just a myriad of things?

Dave O'Toole -- Chief Financial Officer

The change in methodology on the swap fees is, obviously, there's some one-time activity there that occurred where we reversed about $800,000 worth of credit valuation adjustment that had been recorded earlier in the year. But other than that, in non-interest income, Mike?

Mike Maddox -- President and Chief Executive Officer,

You know, we've got a pretty steady increase in our credit card processing fees and ATM fees. So, I don't think there is anything beyond the CVA adjustment that's kind of one-time.

Michael Rose -- Raymond James -- Analyst

OK. Fair enough. Thanks for taking my questions, guys.

George Jones -- President and Chief Executive Officer, CrossFirst Bancshares

Thank you, Michael.

Operator

Thank you. And our next question comes from Matt Olney with Stephens. Your line is now open.

Matt Olney -- Stephens Inc. -- Analyst

Hey, thanks, guys. How are you?

George Jones -- President and Chief Executive Officer, CrossFirst Bancshares

Good. Hi, Matt.

Matt Olney -- Stephens Inc. -- Analyst

Hey, I want to go back to deposit pricing, and I think, you referenced the pool of CDs that will mature in 4Q and 1Q. Can you just remind us of the size of the pool of the CDs, and the average cost of the CDs, and what you're replacing similar duration CDs that currently?

Dave O'Toole -- Chief Financial Officer

Yup. That pool of CDs were two different CD specials that we did last year, and they are 13-month CDs, and there's a few of them that are in there at 2.75%, and there's a big group of them in there at 3%. About $90 million mature in the fourth quarter and the balance remature in the first quarter of 2020. We kind of expected that we can retain a big portion of those CDs and probably roll them into our higher-yielding money market accounts as opposed to another fixed liability instrument, we're trying not to promote too much fixed deposit stuff.

So, we'll move them into an appropriate money market account, probably in that one, depending on whether there's another rate adjustment or two, but if they were moved today, they'd move into something in the $175 million range.

Matt Olney -- Stephens Inc. -- Analyst

OK.

Dave O'Toole -- Chief Financial Officer

Going down on a full point to a point in the quarter on that group of deposits.

Matt Olney -- Stephens Inc. -- Analyst

Yeah. OK. And that's a pretty good chunk there so that would be helpful.

Dave O'Toole -- Chief Financial Officer

Well, there's some of those -- the deposits will have difficulty holding on to, but we think we can keep a majority of them. There's a large part of them that belong to existing customers.

Matt Olney -- Stephens Inc. -- Analyst

And then switching gears over to credit quality. It looks like there was a notable uptick in loans past due 30 to 89 days about and $40 million. Anything in the call out there in terms of this one loan or a few loans or any industry or any color you can give us on that?

Dave O'Toole -- Chief Financial Officer

It was primarily a result of the one credit we've discussed in the past, we did have a couple of administrative rollovers, but nothing we're concerned about from a credit quality standpoint. It was primarily related to one credit.

Matt Olney -- Stephens Inc. -- Analyst

OK. And just to clarify, that's different than the nonaccrual loan we've discussed in the past, this is a new credit, I assume that the --

Dave O'Toole -- Chief Financial Officer

It's the same credit. No, it's the same one. Matt, it truly, if you look at the rest of the credit metrics, it truly is a one-off. I know you guys have heard that from every other management team that you talked to, but it truly is a one-off credit relating to the credit quality of this company.

Matt Olney -- Stephens Inc. -- Analyst

OK. And I guess, just to clarify. So that credit wasn't past due until this past quarter?

Dave O'Toole -- Chief Financial Officer

That's correct.

Matt Olney -- Stephens Inc. -- Analyst

OK, understood. OK. I guess, just lastly for me, you guys have a pretty good concentration of energy lending, any general commentary you can give us on the energy book at this point? And are you guys expecting to grow that book or just maintain at current levels?

Dave O'Toole -- Chief Financial Officer

Overall, I think we're really pleased with the performance of our energy portfolio, the mix continues to stay consistent with where it's been about 70% oil, 30% gas. As we've talked in the past, we really own -- we only loan on proved producing assets, and we're very, very comfortable with our underwriting policy. From a growth standpoint, the goal really is to maintain that portfolio in a range between that 8% and 11%. Today, we're at about 10.9%, we want to continue to be able to take advantage of good opportunities in the market, but we're very mindful of keeping that concentration in that range.

Matt Olney -- Stephens Inc. -- Analyst

OK. And then my last question, I know you've been targeting a 1% ROA and it seems to be within sight as you add more scale. But on the other hand, the rate environment, somewhat moving against you. Any commentary you can give us on that 1% ROA and how close that is to achieving that?

George Jones -- President and Chief Executive Officer, CrossFirst Bancshares

We're obviously in the reforecasting process right now for next year. We're hopeful that we can exceed the 1% ROA in 2020. We're not at that run rate quite yet. But if our balance sheet continues the way it has been and this rate environment stabilizes just a little bit, which is what it looks like the forecast is for next year, we should be able to exceed 1% ROA in 2020.

Matt Olney -- Stephens Inc. -- Analyst

OK. Great. Thank you, guys.

George Jones -- President and Chief Executive Officer, CrossFirst Bancshares

Thank you, Matt.

Operator

Thank you, and I am showing no further questions in the queue at this time. I'll turn the call back to Matt Needham for any closing remarks.

Matt Needham -- Director of Investor Relations

Thank you all again for joining us today. This call can be accessed via replay at our website. And as always, you can contact me with any questions you might have in following up. Again, we appreciate your interest in our company, and for those of you who are investors, thank you for your time, and have a great evening.

Operator

[Operator signoff]

Duration: 32 minutes

Call participants:

Matt Needham -- Director of Investor Relations

George Jones -- President and Chief Executive Officer, CrossFirst Bancshares

Dave O'Toole -- Chief Financial Officer

Mike Maddox -- President and Chief Executive Officer,

Brady Gailey -- KBW -- Analyst

Michael Rose -- Raymond James -- Analyst

Matt Olney -- Stephens Inc. -- Analyst

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