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spk28: Good morning and welcome to the Cross First Bank Shares first quarter 2024 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Mike Daly, Chief Accounting Officer and Head of Investor Relations. Please go ahead. Good morning.
spk05: 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 Cross First Bank Shares, Randy Rapp, President of Cross First Bank, and Ben Klaus, CFO of Cross First Bank Shares. 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 seven of the presentation, available on our website and filed with our earnings release.
spk16: Mike? Thank you, Mike. Good morning, everyone, and thank you for joining us to discuss Cross First Quarter financial results. Our company had a solid first quarter with strong organic loan and deposit growth, stable credit quality, expansion of non-interest 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 our incredible people are 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 non-interest income expansion. The growth in loans, deposits, and non-interest 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 margins, 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 efficiencies. 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 Cross First. And now I'd like to turn the call over to our president of Cross First Bank, Randy Rapp.
spk18: 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 CNI 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 CNI, being restaurants, at 10% of CNI 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 past 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 decreased from $734 million at year-end 23 to $595 million at 3-31-24. 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 nonperforming 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 CNI transactions, and the remaining nonperforming loans are primarily CNI 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 CNI 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 CNI 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 reserves. 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. Non-interest-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 revenues. 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.
spk08: Ben?
spk21: Thanks, Randy, and good morning, everyone. As Mike said, net income this quarter was 18.2 million, or 36 cents per diluted share. This was an increase of about 3% from last quarter, or 1 cent of EPS. Lower provision expense and higher non-interest 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 three basis points compared to the prior quarter to 320, 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 320s 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 320 to 325 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. Non-interest 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, non-interest 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, non-interest 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 head count 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 costs, 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 returns. 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.
spk28: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up question. The first question comes from Woody Lay of KBW. Go ahead, please.
spk07: Hey, good morning, guys. Good morning, Woody. Wanted to start with credit and specifically the 30 to 89 day past due bucket. I believe in the opening comments you called out some administrative issues there. But would that increase just one relationship and any color you can give on that segment?
spk18: Yeah, Woody, this is Randy. There was a couple of larger transactions in that that are in the process of renewing. And as I said, those are administrative. One of them was there's a strong guarantor that was out of the country and is now back and has executed documents. One was a participation that the company was selling, and we expected to be paid off by quarter end, and that got pushed into the quarter. So, you know, no common theme there. Just a couple that at the quarter had those administrative issues. But as I said, we expect that number to return to historical levels in this current quarter.
spk07: Got it. And then on the classified loans, it looks like it picked up a little bit quarter over quarter. I heard the detail, but any additional info on just what drove the late quarter increase?
spk18: The increase was minimal. It went from 14.8% to 15.8% of capital, primarily driven by a couple of CNI transactions. But again, when we look across our substandard in our CNI, there's no real industry concentration to note.
spk07: Got it. All right, that's all for me. Thanks for taking my questions.
spk11: Thanks, buddy.
spk28: The next question comes from Michael Rose of Raymond James. Go ahead, please.
spk17: Hey, good morning, everyone. Thanks for taking my questions. Just circling back on the credit questions that were just asked, you know, I think what I hear from investors on you guys sometimes is, you know, kind of newer bank hasn't been through a credit cycle yet. And now I understand, you know, there's administrative issues. But if I look at the classifieds, I understand queue on queue, they were only up a little bit. But, you know, if you look year over year, they're up, you know, fairly meaningfully. You could probably say that for the industry off of a very low base. But, you know, how can you help us and help investors just gain comfort around, you know, credit underwriting, you know, your reserve levels at this point, and just maybe some fears that you guys have been a high-growth bank. Maybe that growth is moderated as you've gotten bigger and done some deals. But, you know, you haven't been through a credit cycle yet. So, you know, kind of an untested loan book. Just... Just some general commentary on credit that would give us a little bit more comfort on the underwriting process and where we stand in terms of reserves. Thanks.
spk18: Michael, this is Randy. I understand the question. We feel good about our credit metrics and quality, and we do get that that we haven't been through a cycle, but we've been through some pretty interesting times in pandemics and large increases in rates, and the portfolio has continued to perform, and really those metrics have improved. And so in the quarter, with sub-30 non-performings, total reserve of 1.2, we have frequent third-party loan review exams, which validate our grading process and reserve level. And again, we feel good about our underwriting standards and that we've adhered to those. And And again, feel good about the quality of our sponsors. And finally, the quality of the markets which we're in. And there's obviously been a lot of noise in credit and across the country. But when you really look at our footprint in the Midwest, those markets continue to produce strong job creation in migration and are benefiting, I think, our credit metrics.
spk16: Yeah, Michael, I'd just add, I mean, We've had a historic rise in rates over the last 12 months and classified loans to capital still under 16%, which is historically a very low number. Our non-performing number is strong. Over our 16-year history, overall, other than a short blip in 2019, we haven't had any significant charge-offs. We have a lot of third-party eyes on our portfolio and they come back with consistent results. Randy and his team are extremely diligent on monitoring our portfolio and so we feel really good about it. We have strong sponsors. We're in good markets. We stick to our knitting. We have good diversification. And our portfolio, I feel strongly, is going to continue to perform well. And so I don't know what else to do other than keep doing it every quarter. You know, I wish I could fast forward our age to 32 years and we would have cycles, but I can't. You know, we're 16 years old. And as Randy said, we've been through some interesting times and the portfolios continue to perform well.
spk17: Certainly understand, and thanks for all that color. Maybe just as a follow-up, I think I heard the expenses were going to be kind of towards the higher end of the guidance range for the next, I guess, through the rest of the year, but I also did hear you continue to strengthen the fee side. I think you mentioned Treasury credit and SBA. Can you just help us better appreciate how those two may tie, and should we kind of expect continued momentum on the fee income front as we move over the next couple quarters. Thanks.
spk16: Michael, I would say we're very focused on fee income, really proud of the year-over-year increase we've had, almost 30%. And we're going to continue to be focused on expenses. We did have a few one-time things in the first quarter. But those will moderate in Q2. And we believe we still have this tremendous opportunity to drive operating leverage. And we've made plenty of investments in order to allow us to continue to grow. You know, balance sheet growth was going to be, for us, was going to be very moderate. You know, 2% a quarter. is pretty moderate for us. And although we continue to see good opportunities to continue to grow, that's going to help our net interest income. That's going to help our fee income. So we're very focused on driving fee income, holding the line on expenses, and continuing to drive operating revenue. You know, we're in the middle of renegotiating our core systems contract. We believe that can create some savings for us. I mean, there's just some opportunities we have to hold the line on expenses that we will take advantage of.
spk21: And Michael, it's Ben. I'd just add a couple things to what Mike said, which is correct. We believe we'll be toward the upper end of our guidance around 37. And we've already made the investments Mike referenced in card and treasury and SBA and, and, you know, have real opportunity to scale the revenue base there without incremental cost. Got it. Okay.
spk17: So it sounds like the kind of the major investments, the chassis has been built now just extracting the operating leverage. Perfect.
spk06: Correct.
spk17: Maybe just squeeze one in just because you kind of brought up the margin. And if we don't get the, you know, kind of fewer cuts than if we get fewer cuts relative to your kind of two cuts this year, you'd be towards the lower end of the range. Can you just help give us some comfort if, you know, rates continue, at least market rates continue to fire, you know, and inflation continues to be a concern? Just talk about the ability to continue to reprice, you know, loans upward at an elevated pace without losing the balances. And then, you know, it sounds like the NIV mix is hopefully nearing a bottom. But just, you know, what could cause you to kind of fall below that range as we think about the next couple quarters? Thanks.
spk21: Michael, I think page 11 actually is a good tool for that, and if you look at that graph on our loan yield and our cost of deposits, you'll see the illustration of my comment in that the change in cost of deposits quarter over quarter has continued to shrink over the last four quarters, and we believe that will continue to be the case as the pricing pressure on deposits has continued to ebb. Absent our hedge becoming effective and us taking that into the run rate, our yield on assets in recent quarters has outpaced that cost of deposits growth. And so We feel good that those will keep pace with one another, even in a relatively static rate environment. I think, you know, most of the market has now come toward what some of us started the year with, which was just a couple of cuts, and we'll see what happens from there. Great. Thanks for taking all my questions.
spk12: Thanks, Mario.
spk28: The next question comes from Andrew Leash of Piper Sandler. Go ahead, please.
spk09: Thanks, everyone. Thanks for taking the questions. Hey, Andrew. Just on the hedge that became effective this quarter, what else can you let us know about that? Like what rates should we be looking at? And with some of the midterm rates on the yield curve moving up so far this month, could that affect on the second quarter margin be worse then? what you saw in the first quarter.
spk19: Sure. Good morning, Andrew.
spk21: It's Ben. That hedge, just to give a little color, it's really a collar, but the floor of that collar is what's out of the money. It's linked to SOFR. It's a three-year hedge, and so it just started becoming effective in the first quarter. My projection is we're not going to see a lot of movement in SOFR in the second quarter like we may with longer-term rates. As I was mentioning to Michael, you know, we took that into our run rate this quarter, so that caused a little bit of a dip, but it's now in NIM and with our – Yield on earning assets, as I said, keeping pace with the change in cost of funds. We feel good about some stability in the margin, even in a static environment. If we do get a little bit of rate relief from the Fed, we think it can expand a little bit. Got it. All right. That's really helpful.
spk09: And then it sounds like your deposit growth outlook is pretty similar to your long growth forecasts. But, I mean, how should we look at right now the composition of the balance sheet and how deposits are going to flow through to earning assets? I just noticed that the cash and security is down about 14% of earning assets this quarter. Is that a floor in that number? I guess where do you see that being optimized?
spk21: You know, it was down just a little bit, our cash balance quarter over quarter, Andrew, and that's really just a funding issue. It certainly wasn't deliberate. We intend to keep cash in a 3% to 5% range for liquidity management in addition to what we do with our investment portfolio. We just had a little bit better loan growth in the quarter. We didn't have a need to completely backfill that with brokered money and let a little bit of that go. As I said, as a percent of assets, you know, brokered really was flat quarter over quarter, and that was the primary driver of the cash change.
spk16: Andrew, I'd reiterate that our loan growth, our ability to grow loans is going to be directly tied to our ability to grow deposits. So if deposit growth... customer deposit growth doesn't keep up, we won't grow loans as fast. So that will be a governor on our ability to grow.
spk21: This was actually a great quarter because all of our deposit growth was market-driven and organics. We're really happy with that.
spk09: Okay. That's all I got. Thanks for taking these questions, and thanks for the underwriting thoughts. You're welcome. Thanks, Andrew.
spk28: Our next question comes from Matt Olney of Stevens. Go ahead, please.
spk13: Hey, thanks. Good morning. I want to ask about loan growth, and I think one of the headwinds that you guys noted both on this call and on past calls is the potential for additional churn in the loan portfolio. I'm curious how much of that concern around higher churn is around interest rates, And if we don't get very many cuts this year, what that could mean for your assumptions around portfolio churn, and then in part what that could mean for your long-growth outlook.
spk18: Thanks. Hey, Matt. It's Randy. Happy to talk about that. So there's several factors that look into that churn. Age of projects, if they float through stabilization, obviously what's going on in the cap rate environment and what options are available for long-term fixed interest rates will factor into that decision. But as we talk to our clients, we just see a lot of projects they have that they feel are at a point they want to either take advantage and sell or take to a permanent market and You know, we have pretty good clarity into the next 30 to 60 days where we could have close to, you know, 50 to 100 million that turns out into one of, either to a sale in one instance or refinance in another. So, you know, I think obviously the movement in rates that's happened in the last two to three weeks has put a little, you know, slight pause on that as people are just trying to make sure they understand, you know, what those cap rates and permanent rate options are going to be to them. But overall, we still expect that activity to be higher.
spk16: Matt, I would say even with the churn, I mean, whether it happens or not, we still feel pretty good about our guidance on where loans are going to be at the end of the year. And if we do get a little more churn, I think that'll give us opportunity to look at some pretty strong opportunities that really attract a yield. So it ought to help our NIM if we get a little more churn.
spk13: Okay, appreciate the color there. And then on the outlook for the net interest margin, I'm curious what's implied there for the securities yields. I think there's been some restructurings more recently. Could we see more lift from the yields from those restructurings? And then what's the appetite for additional restructurings that could give incremental lift throughout the year? Thanks.
spk21: Good morning, Matt. It's Ben. As I mentioned in my comments, we have seen a little bit of a pickup in our yield. And of course, as we reinvest cash flow from the portfolio and as we continue to grow the investment portfolio commensurate with growth of the balance sheet, we are getting better yields, of course, with the higher rate environment. So I think that will continue to be help, although as a percentage of our balance sheet, it doesn't quite have the impact of loan growth. We're certainly looking at continued opportunities for restructuring. We don't have anything planned or nothing is imminent right now, but we are obviously looking at that at all times. In any ways we've got to enhance yield, we will take advantage of.
spk04: Okay. Thank you, guys.
spk11: You're welcome.
spk28: This concludes our question and answer session. I would like to turn the conference back over to Mike Maddox for any closing remarks. Go ahead, please.
spk16: I just want to thank everybody again for joining our call today. I also want to thank our team and our employees for another strong quarter. They continue to be very diligent in managing the risks that we're all dealing with in today's macroeconomic environment. We're going to continue to focus on growing core deposits, our fee income, and growing capital, while also trying to take advantage of opportunities to return capital to our shareholders. We feel good about where we're positioned. Our balance sheet is well positioned for this rate environment. credit quality remains to be strong and we will continue to be diligent in managing that. So I want to thank everybody for joining us and have a great day.
spk28: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. Thank you. Thank you. Good morning and welcome to the Cross First Bank Shares first quarter 2024 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Mike Daly, Chief Accounting Officer and Head of Investor Relations. Please go ahead. Good morning. Good morning.
spk05: 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 Cross First Bank Shares, Randy Rapp, President of Cross First Bank, and Ben Klaus, CFO of Cross First Bank Shares. 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 seven of the presentation, available on our website and filed with our earnings release. Mike?
spk16: Thank you, Mike. Good morning, everyone, and thank you for joining us to discuss Cross First Quarter financial results. Our company had a solid first quarter with strong organic loan and deposit growth, stable credit quality, expansion of non-interest 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 our incredible people are 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 non-interest income expansion. The growth in loans, deposits, and non-interest 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 Cross First. And now I'd like to turn the call over to our president of Cross First Bank, Randy Rapp.
spk18: 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 CNI 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 CNI, being restaurants, at 10% of CNI 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 past 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 23 to $595 million at 3-31-24. 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 nonperforming 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 CNI transactions, and the remaining nonperforming loans are primarily CNI 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 CNI 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 CNI 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 reserves. 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 percent to $6.6 billion, up $96 million from the previous quarter. Non-interest-bearing deposits decreased slightly during the quarter to $954 million and now represent 14.5 percent 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 revenues. 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.
spk08: Ben?
spk21: Thanks, Randy, and good morning, everyone. As Mike said, net income this quarter was 18.2 million, or 36 cents per diluted share. This was an increase of about 3% from last quarter, or 1 cent of EPS. Lower provision expense and higher non-interest 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 seven 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 three basis points compared to the prior quarter to 320, 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 320s 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 320 to 325, 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. Non-interest 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, non-interest 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, non-interest 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 head count 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 costs, 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 returns. 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.
spk28: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please limit yourself to one question and one follow-up question. The first question comes from Woody Lay of KBW. Go ahead, please.
spk07: Hey, good morning, guys. Good morning, Woody. I wanted to start with credit and specifically the 30 to 89 day past due bucket. I believe in the opening comments you called out, some administrative issues there, but would that increase just one relationship and any color you can give on that segment?
spk18: Yeah, Woody, this is Randy. There was a couple of larger transactions in that that are in the process of renewing, and as I said, those are administrative. One of them was there's a strong guarantor that was out of the country and is now back and has executed documents. It was a participation that the company was selling, and we expected to be paid off by quarter end, and that got pushed into the quarter. So, you know, no common theme there. Just a couple that the quarter had those administrative issues. But as I said, we expect that number to return to historical levels in this current quarter.
spk07: Got it. And then on the classified ones, it looks like it picked up. a little bit quarter over quarter. I heard the detail, but any additional info on just what drove the late quarter increase?
spk18: The increase was minimal. It went from 14.8% to 15.8% of capital, primarily driven by a couple of C&I transactions. But again, when we look across our substandard in our C&I, there's no real industry concentration to note
spk07: Got it. All right, that's all for me. Thanks for taking my questions.
spk11: Thanks, buddy.
spk28: The next question comes from Michael Rose of Raymond James. Go ahead, please.
spk17: Hey, good morning, everyone. Thanks for taking my questions. Just circling back on the credit questions that were just asked, I think what I hear from investors on you guys sometimes is, You know, kind of newer bank, hasn't been through a credit cycle yet. And now I understand, you know, there's administrative issues. But if I look at the classifieds, I understand queue on queue, they were only up a little bit. But, you know, if you look year over year, they're up, you know, fairly meaningfully. You could probably say that for the industry up of a very low base. But, you know, how can you help us and help investors just gain comfort around, you know, credit underwriting, you know, your reserve levels at this point? And just maybe some fears that you guys have been a high-growth bank. Maybe that growth is moderated as you've gotten bigger and done some deals. But you haven't been through a credit cycle yet, so kind of an untested loan book. Just some general commentary on credit that would give us a little bit more comfort on kind of the underwriting process and kind of where we stand in terms of reserves.
spk18: Thanks. Yeah. Hey, Michael, this is Randy. I understand the question. You know, we feel good about our credit metrics and quality, and we do get that that we haven't been through a cycle, but we've been through some pretty interesting times in pandemics and large increases in rates, and the portfolio has continued to perform, and really those metrics have improved. And so in the quarter with sub-30, you know, non-performings, total reserve of 1.2%, You know, we have frequent third-party loan review exams which validate our grading process and reserve level. And, you know, again, we feel good about our underwriting standards and that we've adhered to those. And, again, feel good about the quality of our sponsors and, finally, the quality of the markets which we're in. And there has obviously been a lot of noise in credit and across the country, but when you really look at our footprint, In the Midwest, those markets continue to produce strong job creation in migration and are benefiting, I think, our credit metrics.
spk16: Yeah, Michael, I'd just add, I mean, we've had a historic rise in rates over the last 12 months and classified loans to capital still under 16%, which is historically a very low number. Our non-performing number is strong. And, you know, over our 16-year history, overall, other than a short blip in 2019, I mean, we haven't had any significant charge-offs. And so we have a lot of third-party eyes on our portfolio, and they come back with consistent results. Randy and his team are extremely diligent on monitoring our portfolio. And so we feel really good about it. We have strong sponsors. We're in good markets. We stick to our knitting. We have good diversification. And our portfolio, I feel strongly, is going to continue to perform well. And so I don't know what else to do other than keep doing it every quarter. You know, I wish I could fast forward our age to 32 years and We would have cycles, but I can't. We're 16 years old, and as Randy said, we've been through some interesting times, and the portfolios continue to perform well.
spk17: Certainly understand, and thanks for all that color. Maybe just as a follow-up, I think I heard the expenses were going to be kind of towards the higher end of the guidance range for the next, I guess, the rest of the year, but I also did hear you know, continued strength in the fee side. I think you mentioned Treasury credit and SBA. Can you just help us better appreciate how those two may tie and should we kind of expect continued momentum on the fee income front as we move over the next couple quarters? Thanks.
spk16: Michael, I would say we're very focused on fee income, really proud of the year-over-year increase we've had, almost 30%. And we're going to continue to be focused on expenses. We did have a few one-time things in the first quarter, but those will moderate in Q2. And we believe we still have this tremendous opportunity to drive operating leverage. And We've made plenty of investments in order to allow us to continue to grow. You know, balance sheet growth is going to be, for us, is going to be very moderate. You know, 2% a quarter is pretty moderate for us. And although we continue to see good opportunities to continue to grow, that's going to help our net interest income. That's going to help our fee income. So we're very focused on driving fee income, holding the line on expenses, and continuing to drive operating revenue. We're in the middle of renegotiating our core systems contract. We believe that can create some savings for us. I mean, there's just some opportunities we have to hold the line on expenses that we will take advantage of.
spk21: And Michael, it's Ben. I'd just add a couple things to what Mike said, which is Correct. We believe we'll be toward the upper end of our guidance around 37. And we've already made the investments Mike referenced in card and treasury and SBA and, you know, have real opportunity to scale the revenue base there without incremental costs. Got it. Okay.
spk17: So it sounds like the kind of the major investments, the chassis has been built now, it's just extracting the operating leverage. Perfect.
spk06: Correct.
spk17: Maybe we can just squeeze one in just because you kind of brought up the margin. And if we don't get, you know, kind of fewer cuts than if we get fewer cuts relative to your kind of two cuts this year, you'd be towards the lower end of the range. Can you just give us some comfort if you know, rates continue, at least market rates continue to fire, you know, and inflation continues to be a concern. Just talk about the ability to continue to reprice, you know, loans upward at an elevated pace without losing the balances. And then, you know, it sounds like the NIV mix is hopefully nearing a bottom. But just, you know, what could cause you to kind of fall below that range as we think about the next couple quarters? Thanks. Thanks.
spk21: Michael, I think page 11 actually is a good tool for that. And if you look at that graph on our loan yield and our cost of deposits, you'll see the illustration of my comment in that the change in cost of deposits quarter over quarter has continued to shrink over the last year. four quarters, and we believe that will continue to be the case as the pricing pressure on deposits has continued to ebb. Absent our hedge becoming effective and us taking that into the run rate, our yield on assets in recent quarters has outpaced that cost of deposits growth. We feel good that those will keep pace with one another, even in a relatively static rate environment. I think, you know, most of the market has now come toward what some of us started the year with, which was just a couple of cuts, and we'll see what happens from there. Great. Thanks for taking all my questions.
spk12: Thanks, Michael.
spk28: The next question comes from Andrew Leash of Piper Sandler. Go ahead, please.
spk09: Thanks, everyone. Thanks for taking the questions. Hey, Andrew. Just on the hedge that became effective this quarter, what else can you let us know about that? Like what rates should we be looking at? And with some of the midterm rates on the yield curve moving up so far this month, could that affect on the second quarter margin be worse then? what you saw in the first quarter.
spk19: Sure. Good morning, Andrew.
spk21: It's Ben. That hedge, just to give a little color, it's really a collar, but the floor of that collar is what's out of the money. It's linked to SOFR. It's a three-year hedge, and so it just started becoming effective in the first quarter. My projection is we're not going to see a lot of movement in SOFR in the second quarter like we may with longer-term rates. As I was mentioning to Michael, we took that into our run rate this quarter, so that caused a little bit of a dip, but it's now in NIM and with our Yield on earning assets, as I said, keeping pace with the change in cost of funds. We feel good about some stability in the margin, even in a static environment. If we do get a little bit of rate relief from the Fed, we think it can expand a little bit. Got it. All right. That's really helpful.
spk09: And then it sounds like your deposit growth outlook is pretty similar to your loan growth forecasts. But, I mean, how should we look at right now the composition of the balance sheet and how deposits are going to flow through to earning assets? I just noticed that the cash and securities are down about 14% of earning assets this quarter. Is that a floor in that number? I guess where do you see that being optimized?
spk21: You know, it was down just a little bit, our cash balance quarter over quarter, Andrew, and that's really just a funding issue. It certainly wasn't deliberate. We intend to keep cash in a 3% to 5% range for liquidity management in addition to what we do with our investment portfolio. We just had a little bit better loan growth in the quarter. We didn't have a need to completely backfill that with brokered money and let a little bit of that go. As I said, as a percent of assets, you know, brokered really was flat quarter over quarter, and that was the primary driver of the cash change.
spk16: Andrew, I'd reiterate that our loan growth, our ability to grow loans is going to be directly tied to our ability to grow deposits. So if deposit growth... customer deposit growth doesn't keep up, we won't grow loans as fast. So that will be a governor on our ability to grow.
spk21: This was actually a great quarter because all of our deposit growth was market-driven and organics. We're really happy with that.
spk09: Okay. That's all I got. Thanks for taking these questions, and thanks for the underwriting thoughts and credit. You're welcome. Thanks, Andrew.
spk28: Our next question comes from Matt Olney of Stevens. Go ahead, please.
spk13: Hey, thanks. Good morning. Good morning. About loan growth, and I think one of the headwinds that you guys noted both on this call and on past calls is the potential for additional churn in the loan portfolio. I'm curious how much of that concern around higher churn is around interest rates And if we don't get very many cuts this year, what that could mean for your assumptions around portfolio churn, and then in part what that could mean for your long-growth outlook.
spk18: Thanks. Hey, Matt. It's Randy. Happy to talk about that. So there's several factors that look into that churn. Age of projects, if they float through stabilization, obviously what's going on in the cap rate environment and what options are available for long-term fixed interest rates will factor into that decision. But as we talk to our clients, we just see a lot of projects they have that they feel are at a point they want to either take advantage and sell or take to a permanent market and You know, we have pretty good clarity into the next 30 to 60 days where we could have close to, you know, 50 to 100 million that turns out into one of, either to a sale in one instance or refinance in another. So, you know, I think obviously the movement in rates that's happened in the last two to three weeks has put a little, you know, slight pause on that as people are just trying to make sure they understand, you know, what those cap rates and permanent rate options are going to be to them. But overall, we still expect that activity to be higher.
spk16: Matt, I would say even with the churn, I mean, whether it happens or not, we still feel pretty good about our guidance on where loans are going to be at the end of the year. And if we do get a little more churn, I think that'll give us opportunity to look at some pretty strong opportunities at really attractive yields. So it ought to help our NIM if we get a little more churn.
spk13: Okay, appreciate the color there. And then on the outlook for the net interest margin, I'm curious what's implied there for the securities yields. I think there's been some restructurings more recently. Could we see more lift from the yields from those restructurings? And then what's the appetite for additional restructurings that could give incremental lift throughout the year? Thanks.
spk21: Good morning, Matt. It's Ben. As I mentioned in my comments, we have seen a little bit of a pickup in our yield. And of course, as we reinvest cash flow from the portfolio and as we continue to grow the investment portfolio commensurate with growth of the balance sheet, we are getting better yields, of course, with the higher rate environment. So I think that will continue to be help, although as a percentage of our balance sheet, it doesn't quite have the impact of loan growth. We're certainly looking at continued opportunities for restructuring. We don't have anything planned or nothing is imminent right now, but we are obviously looking at that at all times. In any ways we've got to enhance yield, we will take advantage of.
spk04: Okay. Thank you, guys.
spk11: You're welcome.
spk28: This concludes our question and answer session. I would like to turn the conference back over to Mike Maddox for any closing remarks. Go ahead, please.
spk16: I just want to thank everybody again for joining our call today. I also want to thank our team and our employees for another strong quarter. They continue to be very diligent in managing the risks that we're all dealing with in today's macroeconomic environment. We're going to continue to focus on growing core deposits, our fee income, and growing capital, while also trying to take advantage of opportunities to return capital to our shareholders. We feel good about where we're positioned. Our balance sheet is well positioned for this rate environment. Credit quality remains to be strong, and we will continue to be diligent in managing that. So I want to thank everybody for joining us, and have a great day.
spk28: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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