Ladies and gentlemen, thank you for standing by, and welcome to the CrossFirst First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Matt Needham, Director of Investor Relations.

Thank you, and please go ahead, sir. .

Welcome, and thank you for joining us today. On the call are George Jones, President and CEO of CrossFirst Bankshares; Dave O'Toole, Chief Financial Officer of CrossFirst Bankshares; and Mike Maddox, President and CEO, CrossFirst Bank.

Our Chief Credit Officer, Randy Rapp, will also be joining the Q&A portion of the call to answer more specific questions regarding our loan portfolio. As a reminder, a telephonic replay of this call, our earnings release and presentation will be available on our Investor Relations website for an extended period of time.

Before we begin, let me remind everyone that 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 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 review. Any forward-looking statements speak only as of today, and we undertake no obligation to 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 or presentation and copies are available on our Investor Relations website. All earnings per share metrics discussed on today's call are provided on a diluted per share basis. I'd now like to turn the call over to George Jones. .

Thank you, Matt. Good afternoon, everyone. I'd like to start the call off today by saying we wish the best to our employees, customers, shareholders and their families during these unprecedented and uncertain times. No one knows the duration or ultimate impact of this pandemic, but we're doing our best to manage through it.

We are focused on helping our local businesses and communities while keeping our employees and our clients safe. Throughout my entire banking career, I have never seen an environment like the one we are faced with today. .

CrossFirst moved quickly to respond to the crisis and implemented a comprehensive business continuity plan in early March, several weeks prior to the issuance of many state stay-at-home orders.

Approximately 70% of our employees are working from home and for those who continue to serve our customers from the bank, we're taking extra precautions for their safety.

We also have reallocated resources to handle the large volumes of applications received under the Paycheck Protection Program, in addition to requests for loan modifications and principal or interest payment deferments.

As part of the CrossFirst COVID-19 response, a number of financial and risk management initiatives have been implemented to respond to the potential economic headwinds. We expect to see a continued rollout of government relief and funding to support businesses.

And CrossFirst will continue to help our customers implement these programs and grant loan modifications in a safe and sound manner. .

Now as I move on to our performance, I'm proud to report another quarter of positive operating revenue growth. Our pretax pre-provision net income was the best in the company's history despite the uniquely challenging operating and interest rate environment.

Operating revenue reached $40.3 million, up 14% year-over-year and increased 2% from the previous quarter. The combination of continued asset growth and reacting quickly to reprice deposits after Fed rate decisions allowed us to slightly increase our tax equivalent net interest margin to 3.24%.

We recorded a $14 million provision during the quarter mostly due to increased uncertainty in the loan portfolio from economic conditions surrounding the COVID-19 pandemic and recent oil market volatility. .

This prudent decision obviously affected our bottom line net income and related performance metrics for the first quarter. During the quarter, we achieved a 55% efficiency ratio, and our cost management initiatives are being accelerated as part of our COVID-19 response plan.

After achieving earnings per share of $0.07 and after having positive market impacts on our bond portfolio, our tangible book value per share at the end of the quarter was $11.60. Our teams continue to deliver healthy organic growth and deposit growth for the quarter as we crossed over $5 billion mark in assets.

Our year-over-year loan and deposit growth reached 22% and 17%, respectively. Despite the economic uncertainty, we continue to move forward with relocating our Kansas City, Missouri, branch to a more prominent location and opening a new office in Frisco, Texas.

With our strong capital position and focus on credit quality, we believe we are still well positioned to take advantage of future opportunities. We trust that our well-diversified loan portfolio and strong underwriting criteria have positioned the portfolio to withstand the current economic environment.

At the end of the first quarter, our nonperforming assets declined, but we had a slight increase in our adversely classified loans. The full impact to our markets and the overall loan portfolio is still unknown.

The recovery will depend on the time it takes businesses and consumers to regain confidence in the economy, and people have a safe environment to operate and to function. We're closely monitoring our portfolio. And with that, I would now like to turn the call over to CEO and President of CrossFirst Bank, Mike Maddox.

For a more detailed discussion regarding our loans and our asset quality.

Mike?.

Thank you, George, and good afternoon. I want to echo everything George just said about the safety and well-being of our employees and customers. We always have and always will serve our customers and local communities in extraordinary ways, particularly during these extremely challenging times.

Our branch-light strategy, relationship banking model and technology have really allowed us to quickly implement our pandemic plan, work remotely to be safe and have the ability to effectively serve our customers when they need it most.

As a part of our broader risk management strategy, we prioritized implementing the Paycheck Protection Program is the most expedient method to getting incremental liquidity to our clients. As of Tuesday, April 20, more than 900 loans have been approved by the SBA, representing just under $400 million of loan proceeds.

Furthermore, the Paycheck Protection Program allowed us to efficiently serve over 200 new customers and loan over $100 million of program funding outside of our existing customer base. We believe those customers can be transitioned into stronger long-term relationships.

Our successful implementation of the Paycheck Protection Program with the small business administration is a great example of how our strong teams continue to position us for long-term success. For most clients who have requested payment deferrals, we are modifying loans to help customers preserve capital and liquidity.

Our approach to loan modification and deferment request is structured to help our clients while assessing their unique capacity to support the loan as well as the ongoing risk to CrossFirst. As of April 20, we have provided modifications to almost 350 loans, representing over $750 million worth of loans.

In the month of March, we also served our customers by extending more than $180 million of new credit, which partially includes $137 million of additional draws on operating lines since December 31, 2019.

We are working side-by-side with our clients, which should benefit CrossFirst, our communities and our clients in the long run by responsibly helping them through these short-term challenges. We believe this will ultimately benefit our shareholders in the long run. .

During the quarter, we increased average loans by 4% from the fourth quarter of 2019 and 20% compared to the first quarter of 2019. In addition, our loan portfolio continues to be balanced between commercial and industrial and commercial real estate credits.

We continue to use our strong relationship-based banking model at CrossFirst bank, supported by cash flow based lending that consider sensitivity to stress, proactive management and portfolio diversification, which should allow us to support growth through the economic cycle and produce results.

Because of the COVID-19 pandemic, we assessed our portfolio and identified key areas for increased monitoring and attention from our teams. We have highlighted certain at-risk segments of our loan portfolio given the current economic uncertainty. The ultimate impact to these portfolios will depend on the duration of the COVID-19 pandemic.

The impact of shelter in place orders on consumer and business activity and the extent of the benefits from government stimulus programs. Depending on how long oil prices remain depressed, and the duration of the pandemic, we could see increased changes in adverse risk ratings, impairments and charge-offs.

We will continue to monitor the adequacy of our allowance for loan losses on an ongoing basis and evaluate the reserve as credit conditions change. The energy portfolio is $399 million, or about 10% of our total loan portfolio, but only $257 million or 6.4% of total loan portfolio is exposed to the recent oil market volatility. .

Oil pricing has been negatively impacted by lower consumption from the COVID-19 pandemic, compounded with high production and inventory supplies from ongoing political disputes. Again, as with all banks, we are not immune to this downturn.

However, we lend on proven and producing reserves and typically do not lend to midstream, shale or oilfield service companies. We are conservatively lent as a senior secured lender with customers that are backed by long-life assets and require hedging of our largest customers.

Our portfolio weathered the downturn in 2016, so the portfolio has been shocked for adverse market conditions in recent years. The company will work closely with our borrowers and continue to monitor the situation over the coming months.

More information has been placed in the supplemental materials of our earnings presentation on the other segments impacted by COVID-19, and we look forward to answering any questions you might have on those portfolios. .

While the net charge-off ratio increased on both a linked-quarter and year-over-year basis, it was due to the partial charge-off of our previously disclosed large nonperforming asset, making its way through the credit cycle. The decline in nonperforming assets was directly related to that same charge-off.

We have taken a proactive approach to evaluating risk ratings across the entire commercial loan portfolio and have considered risk rating changes in the valuation of our allowance for credit losses. .

Our loan loss provision of $14 million in the first quarter of 2020 compared to our normal quarterly provisioning was related to changes in risk ratings and deterioration in economic conditions.

The increase in the allowance for loan loss is considered our best estimate at this time and is based on a significantly slower economic growth, higher unemployment and partially offset by the benefits of the government stimulus programs pursuant to the CARES Act. .

Our classified assets to capital and allowance for loan loss ratio for the first quarter increased to 15.8% compared to the fourth quarter of 2019 and decreased slightly year-over-year. At the end of the quarter, the overall loan loss reserve was 1.29% of loans compared to 1.48% in the fourth quarter of 2019.

The decline was a result of the charge-off of our previously disclosed nonperforming asset, offset by our reserve build. In addition, at this time, we do not have any plans to adopt CECL in 2020, though we continue to run parallel analysis on the potential impact of our reserves and capital..

As we have mentioned several times, the banking industry is operating at an historic and extremely challenging environment. Our balance sheet is strong. Our customers are diverse and our credit underwriting standards are thorough.

And our core deposits have increased from the previous quarter, that some customers are desiring to hold cash and low-risk investments. It's at times like this when portfolio diversity, combined with disciplined and consistent underwriting will pay off.

Even after the economy opens back up, it is unclear how long it will take to offset the psychological ramifications this has had on our markets and our customers. We have a very strong capital position. No debt in our capital structure, and we believe we have enough liquidity to manage through these difficult times.

For now, we will continue doing what we do best and remain highly focused on doing what we can for our customers, communities and employees to get through this unique situation. Now I would like to turn the call over to our Chief Financial Officer, Dave O'Toole, for a more detailed discussion of the financial results. .

Thank you, Mike. I would also like to wish the best to our employees, customers, shareholders and their families during these turbulent and uncertain times. As George mentioned, we had another positive quarter of operating revenue growth, primarily because we're able to maintain net interest margin and grow our balance sheet.

Net interest income was $38.2 million for the quarter, representing a 3% increase on a linked-quarter basis and a 14% increase from the same quarter in 2019. For the quarter, tax equivalent net interest margin increased from 3.23% to 3.24%, consistent with what we anticipated at the end of 2019.

Loan yields declined 23 basis points and interest-bearing deposit costs decreased 28 basis points on a linked-quarter basis, mostly due to the impact and timing of 150 basis points of FOMC adjustments in the first quarter, combined with certain balance sheet mix changes.

To illustrate the opportunity presented by the Q1 FOMC rate adjustments, we measured the incremental cost for new funds as of March 31. And found that with weighted average deposit pricing, our cost of new funding was 0.52% compared to actual first quarter cost of funds of 1.49%.

During the quarter, we shortened the duration of our interest-bearing liabilities to take advantage of lower interest rates and replace nearly $150 million of brokered CDs with shorter duration, less expensive non deposit funding, which resulted in an increase in our loan-to-deposit ratio to 101%.

We continue to use our marketable securities portfolio to optimize liquidity, income and mitigate downward pressure from interest rates. In addition to reinvesting our cash flows and called securities, we capitalized on certain market movements during the quarter by selling a small block of municipal bonds, resulting in a $300,000 realized gain.

The resulting total unrealized gain in the marketable securities portfolio at the end of the quarter was approximately $30 million. The modest investment portfolio yield declines for the year were a combination of lower reinvestment rates and yields affected by higher prepayment speeds on mortgage-backed securities.

Consequently, the tax equivalent portfolio yield was 3.21%, reflecting a small change from the previous quarter. Given the current economic conditions and uncertainty, we regularly evaluate our municipal portfolio and dispose of bonds that may present an average -- an above-average credit risk to the bank.

This helps us concentrate the bulk of our portfolio in highly rated investment-grade securities that are constantly monitored by an independent third-party adviser. For the first quarter of 2020, total operating revenue grew by 14% on a year-over-year comparison and 2% compared to the previous quarter.

Noninterest expense increased just 2%, resulting in positive operating leverage for the first quarter of 2020. Solid and consistent balance sheet momentum, coupled with diligent expense management drove pretax pre-provision net income to $18.1 million, up 43% from a year earlier.

This may become a very relevant metric in the current economic environment to evaluate the ongoing earnings power of CrossFirst. And currently, we expect it to continue to trend favorably. On a linked-quarter basis, our efficiency ratio decreased 50 basis points to 55.1%.

This improvement can be attributed to decreases in discretionary spending, and other operating expenses, while operating revenues have increased. As a core component of our strategy, we strive for disciplined expense management and sustain positive operating leverage and increasing pretax provision profitability.

We improved the assets per employee ratio to $13.9 million during the first quarter of 2020, while noninterest expense ratios remained well-managed and trending favorably for the third straight quarter. We've continued to manage the pace of hiring, which accounts for 65% of our noninterest expense.

As George mentioned, our cost management initiatives have been accelerated as part of our COVID-19 response plan.

We have suspended hiring with the exception of occasional replacement positions and with the economic slowdown, we selectively reduced our discretionary spending in hopes that this will offset some of the additional provisioning that may be required in the future.

Our management team feels strongly about reducing costs to strengthen the company for the long term. .

Return on average assets for the quarter is clearly impacted by our elevated loan loss provision in the quarter. However, our pretax pre-provision ROAA was 1.46%. In closing, our Board, advisory boards and management have significant ownership in CrossFirst, so we are well aware of where the stock price is trading.

We have deliberated over a stock buyback given how low our valuation is compared to historical prices. We are regularly and aggressively stress testing our credit and capital with a myriad of Fed defined and other more stressful COVID-19 recessionary scenarios.

Many banks have suspended their buyback programs, and our current position is to preserve capital and evaluate a buyback at a later date. Our business model involves robust growth, so we went to the capital markets in 2019 for our IPO. We have planned to use the proceeds to support our growth strategy.

Today, we are fortunate to have the flexibility of those funds and to be well capitalized for safety and soundness as we navigate through the COVID-19 pandemic. .

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

[Operator Instructions] Our first question comes from the line of Michael Rose with Raymond James. .

Just wanted to get some color on -- I think you mentioned that you guys are running parallel CECL models.

And I guess I'm just trying to figure out what that would have necessitated in terms of a provision this quarter versus the incurred loss model? And then maybe just using the incurred loss model, what were some of the assumptions unemployment, oil prices, et cetera, that went into developing that number for the quarter?.

Michael, because we don't have to adopt CECL for some time yet. We are still working on the model a little bit. We're making adjustments to it as we run these parallel runs. We'd prefer not to try to disclose that at this point in time.

But obviously, with our unfunded commitment levels on this bank, we do have some adjustment that we'll need to make to go ahead and recognize the reserves against those assets. .

Okay. And then -- yes, go ahead. Sorry. .

Michael, this is Randy. I would just add to that, that we are under the incurred loss model. We've not seen significant grade migration in the portfolio. And so we really made adjustments in several of the key factors to support the higher reserve.

Again, just looking at the uncertainty that existed in the oil space and then also just in the general economic conditions, wasn't any one metric we really tied that [ knot ] to. .

Okay. I guess just drilling down specifically into the categories that you mentioned is at risk. It looks like it's 26%.

That seems to be a little bit higher than some others that have -- and I know it's apples to oranges, but I guess, can you help us feel comfortable or what can you say to us to make us feel comfortable that at 1.29% reserve ratio that we should feel comfortable with the ability to absorb losses from here. .

Yes, Michael, this is Mike. We -- as a management team, we've divided up these higher risk areas to really try to be proactive to make sure we are giving them full attention. And so I've taken some and our Chief Credit Officer, Randy, has taken some. And so I'll let him start with oil, and we can work our way through Page 9. .

Yes. Michael, this is Randy again. So on oil, you know our portfolio, but just to reiterate, I mean, it's an E&P-focused portfolio. It's a PDP-only portfolio, about 64% oil, 35% gas. Advance rates at -- when we look at new transactions, they're in the 60% of the PDP, PV9 value.

We also run the sensitivity case based on a reduced cash flow based on our price deck. I think it's important to note that we have a very experienced lending team that's been through several cycles. We have an experienced customer base that has been through several cycles. We have a very long-lived property set with our average half-life over 10 years.

So it is a longer horizon portfolio. And we've got an experienced approval team that's also got several years in the business. Most of our transactions, all of our transactions actually are single bank. So we're not in big syndicated facilities. Our borrowers do not have any mezz debt.

And so when you look at some -- where some of the issues have been with some of the other energy borrowers, it's actually been at that -- those that had higher mezz levels. So we feel good about the quality of the portfolio.

Obviously, there's been a lot of noise around the prices, certainly on the spot market as we've seen here in the last several weeks. But I would tell you that we tend to take a longer-term view of pricing. We follow, obviously, and look more at the strip and what it says out for the next year or 2.

And the strip has oil going back to almost $30 by the end of the year and higher than that in '21 and gas, which has not been as negatively impacted goes to $3 this year. So we're looking more at the long term when we set our price deck.

And so I think those are some things that are characteristics of that portfolio, which should make you actually have some confidence in that in the portfolio. And when we ended the quarter, we had 93% of the portfolio as past grade. So again, we've not seen significant grade migration in the portfolio. .

Okay. Maybe just 1 follow-up for me. Just wanted to reconcile some of the loan growth this quarter. So I think you had mentioned $137 million of draws and then it looks like you had some participations that went up in terms of the loan participations sold or purchased, excuse me, those balances went up quarter-on-quarter. You're going to have the PPP.

What I'm trying to figure out is you previously laid out a 20% growth target, plus or minus. Understanding the backdrop, we're probably not going to get there. But what's -- as you look in your crystal ball today for the next 3 quarters, I know it's really difficult.

But can you give us some semblance of what you're targeting from a growth perspective and maybe what areas do you see opportunities. And I would assume that some of these at risk categories would be areas you wouldn't want to focus on. .

Yes, Michael, it's just -- it's really hard to predict what future loan growth is going to look like over the next several quarters. We just don't know how quickly that activity is going to come back. In the first quarter, a lot of our loan growth was related to some really strong real estate loans, a lot of those out of our Dallas office.

But on the C&I side and certainly in these areas where we see more risk, it's not likely that we're going to see a lot of new loan growth. .

But still positive PPNR trends, correct?.

Yes. .

And our next question comes from the line of Brady Gailey with KBW. .

I wanted to start with the liquor distributor loan. And yes, I saw the net charge off, was that just charging off the allocated reserves? Or did you charge that off more? I think that loan was $32 million previously, kind of written down to $11 million.

Is there any of that loan left that's potentially at risk?.

Brady, this is Randy. I'll take that. We did, as been disclosed, charge-off $18 million of that credit in Q1. They also were able to liquidate a portion of our collateral, and there was a pay down of over $4 million that came from that. We do still have a balance on that transaction that is less than $10 million.

We do still have reserves against that, and we're in the process of liquidating some of the other assets of the business and of the guarantor. .

All right. And then looking at your energy portfolio, it's helpful to see that 45% of it was hedged. Can you just give us a little more color on does that mean that 45% of the production is hedged? Or is that 45% just of your customers have some level hedge? Just any additional color on how that hedging is. .

Sure, Brady. This is Randy again. How we -- when we disclose the hedging at 45% total, 43% oil, that is a dollar-weighted hedge of the production.

So that's not number of borrowers that actually have some level of hedging that number would be higher than the 43%, but the 43% is actually the production for 2020 that is hedged, and that is at an average price of $51.12 on oil, 48% dollar-weighted on gas at an average price of $2.14. .

All right. And then lastly for me on the service charge side, you had a nice bump up in service charges.

Was there anything abnormal in that roughly $0.5 million of service charges this quarter?.

No. I think, Brady, it's just continued growth in our credit card fee business as well as our analysis service charges, we continue to really have nice growth in both those areas. .

And our next question comes from the line of Andrew Liesch with Piper Sandler. .

Just on the margin here. It looks like there's substantial room on the funding cost side, just looking at some of the disclosures you guys made. But also earning assets are coming down too.

What -- I guess, I'm curious, what was the average rate of new loan production here in the first quarter?.

I don't have that on the tip of my tongue, Andrew. Our loan -- our overall loan yield, as you can see, came down as the number I presented in there. But I don't have the number. I can get it to you after the call. .

I guess just at a higher level than if -- just with the opportunities on the funding side and the margins being fairly resilient here.

Can we see it expand from this level in the quarters ahead?.

We think our margin is fairly resilient. It's certainly -- we certainly can hold it at the current level. It will expand somewhat just due to the impact of the yield related fees from the PPP program. But those are temporary. Those will go through this system here in the next quarter or thereabouts.

And after that, we feel pretty good about margins at the current rate environment that we're in right now. We have shortened down our liabilities to the point where we actually have room to lower our cost of deposits even further, if necessary.

But right now, we're concentrating on getting through this little bubble from the PPP, and that's going to kind of move margin around in funny ways for a short period of time. .

That's helpful. And then on the expense side, it sounds like some acceleration of your cost, cost in payment or cost control initiatives.

Should we expect to see expenses come down here from this $22 million level?.

Slightly, yes. With our growing balance sheet and our growing operating revenues, part of our goal is to hold our expense levels where they're at and not let them grow at the pace they were before.

There could still be a little bit of an increase the balance of this year and our operating expenses over where they were in the first quarter, but not much. .

And our last question comes from the line of Matt Olney with Stephens. .

I want to start with credit. And I think in the prepared remarks, you mentioned addition of adverse rated loans in the first quarter.

What was that increase of the adverse rated loans? And any more commentary you can give us as far as the inflows, what industries were they in, and were the inflows from COVID-19 witnessed from March or the inflows from earlier in the quarter?.

Hey, Matt, this is Randy. I'll take that. It was not COVID related. It was primarily one $23 million transaction that is well secured. It's in the process of resolution, and we do not expect a material loss on that credit at all. .

And what was the industry?.

It's in the residential alarm industry. .

Okay. And then going back to the discussion around the draws in the first quarter. I think there was $137 million.

Any more details as far as which industries you saw those draws in?.

It really went in a specific industry. It was mostly in our C&I portfolio. And it was really across the board. .

Okay. And then just a kind of a higher level strategic question. Back in 2019, it sounded like the bank was taking a pause from market expansion and branch expansion. But then in January, it seemed like you were ready to get back and invest more because of the opportunities that you saw out there.

Obviously, the environment has changed quite a bit since January. So just give us kind of a high-level update as far as where you see the opportunities and as it relates to market expansion. .

I think everybody is trying to evaluate what that looks like in the future and when we come out of this. And I think it'd be probably premature to talk too much about where we see the upcoming opportunities. But certainly, we think we're well positioned as a company to be very successful as we come out of this time frame.

And we've been able to really grow organically through the last few months, and we had a very good first quarter, and we believe we still have a lot of opportunity in our existing markets, and we're always evaluating additional opportunities. .

Okay. Yes, understood. It's still early in the process. I'm sure that's still changing as we speak. So my last question, I want to go back to the energy portfolio. And you guys disclosed that the energy allowance, I think, it was 1.9% of the overall energy loans.

As you're aware, many of your peers have energy allowance well north of that, sometimes up to 10%. And I get it.

There's a large variance and not all energy books are the same, but how do you think about your energy allowance versus some of the peers? And how do you justify that being quite a bit lower?.

Matt, this is Randy. I think when you're comparing banks, it's hard because you have to make sure you're comparing apples and apples on portfolios. And I said, when we look at our portfolio and looked at it, PDP-only portfolio, some of those banks with higher reserves have quite a bit of oilfield service and some midstream that we don't have.

So that, I think that's one. We have a methodology in our incurred model. We have not seen a lot of significant grade migration in that portfolio, which would require additional reserves. And the level today is higher than the entire losses in that portfolio since we've been in that business since 2014. .

And I'm not showing any further questions at this time. So this does conclude today's question-and-answer session. I would now like to turn the call back to Matt Needham for closing remarks. .

Thank you again for joining us today. This call can be accessed via replay at our website. And as always, you can contact me with any follow-up questions you might have. Again, we appreciate your interest or investment in our company, and thank you for taking time with us this afternoon. .

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect..