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spk21: Pardon me, this is the operator. Today's conference is scheduled to begin shortly. Please continue to stand by. And thank you for your patience. Thank you. Thank you.
spk16: Good day and thank you for standing by.
spk21: Welcome to the Cross First Bank Shares Q4 and full year 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to the Director of Investor Relations, Heather Worley. Please go ahead.
spk19: Good morning, and thank you for joining us today for the Cross First Bank Shares fourth quarter and full year 2021 earnings conference call. I'm Heather Worley, Director of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on current expectations of future results or events. Forward-looking statements are subject to both known and unknown 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. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K, and in subsequent filings with the SEC. Our speakers for the call today are Mike Maddox, President and CEO, Ben Klaus, CFO, and Randy Rapp, Chief Risk Officer and Chief Credit Officer. At the conclusion of our prepared remarks, our operator, Carmen, will facilitate a Q&A session. At this time, I would like to turn the call over to Mike, who will begin on slide four of the webcast. Mike?
spk13: Thank you, Heather. Good morning and thank you for joining us today as we discuss our fourth quarter and full year 2021 results. I must admit we feel as good about our last 13 months as the Kansas City Chiefs do about the last 13 seconds Sunday night. As we reflect on 2021, I think it's important to take a step back and look at our performance over the last few years. Since going public in August of 2019, much of the world, Our industry and our company has changed. One thing that has not changed is our focus on delivering extraordinary service, which fuels our growth. I'm very proud of the progress our team has made during the past two and a half years, delivering record performance. We produce growth in both revenue and earnings. As we expected, the substantial improvement in our credit quality puts us in a great position to continue on our growth trajectory. The success we've had would not have been possible without the hard work of our employees and their dedication to providing exceptional service to our clients. The Cross First culture and business model are differentiators that help us attract talent in a competitive market. Our focus on our core values and our one team, one bank, shared vision mindset is working and will continue to guide us going forward. We accelerated our momentum in 2021 with record earnings and an all-time high level of operating revenue. We also marked a return to loan growth in the last half of the year, even with record paydowns related to low interest rates and extremely low cap rates on real estate after normalizing the impact of PPP loan reductions. Credit quality substantially improved to a level that we expect to maintain going forward. We also made progress this year in improving our deposit mix with significant growth in non-interest-bearing accounts. Our team meaningfully grew fee income led by the expansion of our credit card product and treasury services. We were able to deliver record profitability even with making investments and growth by expanding to Phoenix. 2021 also included supplemental investments in talent and technology to drive growth. We strengthened our technology strategy to enhance the digital experience for clients. In our view, it is imperative to make investments in digital solutions that deliver unparalleled client experience and revenue-generating opportunities. we are beginning the implementation phase of providing a unified digital platform for clients across all channels by partnering with Q2. Q2's platform gives us the opportunity to enhance our digital client experience. In addition, we continue to invest in bank-sponsored FinTech funds, so we are at the forefront of developing technologies as they emerge for our bank and for our clients in the future. Even the best technology is not a substitute for extraordinary personal service. Adding top-tier talent remains a primary focus for us as a driver for our future growth. We completed a successful market expansion to Arizona with a seasoned banking team in Phoenix. We have continued to add high-caliber talent at all levels and enhanced our leadership team in 2021 with the hiring of a Texas regional president, Last but not least, we hire new executive leadership in technology, investor relations, and finance, all with tremendous industry experience. A huge part of our culture is our focus on employee engagement. Our engagement survey was taken by 94% of our employees and yielded record scores. CrossFirst was also named as one of the best places to work by the Kansas City Business Journal this past year. Lastly, we continue to focus on the difference we're making in our communities. We published our first annual impact report illustrating our connections and dedication to the communities where we live and work. We want to make a difference, and our employees do a great job of volunteering their time to help others. I couldn't be more proud of their efforts. Beyond the financial performance highlights I mentioned that Ben will cover in more detail, we effectively executed on our strategic stock buyback initiative to take advantage of our current stock price during the fourth quarter. The generation of consistent earnings will better position us to produce greater total shareholder return going forward. Our fourth quarter was a great capstone to the year with several accomplishments across measures of financial performance, credit quality, improvement, loan growth, talent additions, and a more robust focus on technology. As we look forward to 2022, we remain confident in our proven technology-focused branch-wide business model. We are strategically positioned to continue to produce exceptional results. The investments we are making today in people and technology will prepare us for the future. I am proud of the outstanding team at Cross First, and I am incredibly excited about our future. Now I will hand the call over to Ben to cover the financial results in more detail.
spk07: Thanks, Mike, and good morning, everyone. As Mike indicated, we had a great quarter and a great year, with net income on a year-to-date basis of $69.4 million, or $1.33 earnings per diluted share. For the quarter, we earned $20.8 million, or $0.40 earnings per diluted share. This quarter included continued significant improvement in credit quality, and we released an additional $5 million of reserves. We also continued our ability to grow loans with a 6.6% annualized growth rate, excluding the impact of PPP loans in the fourth quarter. 2021 was a significant milestone as we continued our impressive five-year trend of growth in pre-tax, pre-provision earnings, and our five-year growth trend in operating revenue, with 2021 marking a high in both categories. Quarterly return on average assets was 1.50%, and return on average equity was 12.57%. These ratios were impacted by the release of reserves in both the third and fourth quarters. For the year, return on average assets was up from 0.24% in 2020 to to 1.24% in 21. And return on average equity was up from 2.05% in 20 to 10.84% in 2021. We are excited to see these return rates continue to improve as a result of our earnings momentum driven by credit improvement and execution of our strategy. Turning to slide 10, Our interest income in the fourth quarter was $49.2 million, which increased primarily due to credit improvement and incremental loan fees, as average loan balances were flat quarter over quarter due to growth being partly offset by the continuing impact of PPP loan forgiveness. Our remaining PPP loan balance was $65 million at the end of the quarter, with $1.7 million in unearned fees yet to be recognized, which we expect to be spread over a few more quarters. Interest expense was up slightly for the quarter. We continue to have higher rate time deposits mature, which brought the deposit cost down for the quarter, but this was offset by repayment of some higher cost borrowings. We expect to realize savings from this going forward and expect cost of funds to decline in Q1. We continued our demand deposit growth this quarter, ending the quarter with 25% of deposits in non-interest-bearing accounts. Net interest margin was up for the quarter at 3.28% on a fully tax-equivalent basis, due primarily to increased interest income, as I mentioned. Expect margin to moderate in the first quarter in the absence of this quarter's credit improvement-driven impacts. Year over year, our margin was up slightly, with the cost of funds being significantly lower due to the rate environment and reductions in time deposits and borrowings. We are somewhat asset sensitive and see opportunity as rates rise to lag deposit rate increases and potentially enhance our margin going forward. We have benefited from floors on a significant portion of our loan portfolio during the low rate environment. and we have greater sensitivity as rates move above those floors. Non-interest income for the quarter was $4.8 million and improved significantly from third quarter. The prior quarter had a $6.2 million asset impairment charge as well as gains from sales of securities of $1 million. Absent these items, the fourth quarter had nearly $700,000 of growth in credit card income, continuing our trend there. Non-interest expenses for the quarter were $26.7 million up from the third quarter. Salaries and benefits increased $1.1 million due to build-out of the Phoenix market, adding to our teams in Texas, and higher incentive expenses. Other non-interest expenses increased primarily due to credit card costs, commensurate with the revenue increase I mentioned. I expect non-interest expense to be relatively flat into the first quarter, and I'll provide updated guidance for the year on our first quarter call. For the year, non-interest income grew $1.9 million, or 16%, compared to 2020. This was driven by a $3.6 million increase in credit card income, increased service charges of $1.8 million, increased BOLI income of $1.7 million, economic development incentives, and higher letter of credit fees. These increases were partially offset by the $6.2 million asset impairment charge in the third quarter of 21. Turning to slide 13, our efficiency ratio has continued to move into the low 50s. This is an extension of a multi-year trend in efficiency ratio improvement and an overall focus on managing expenses prudently while still supporting growth. We will continue to invest in technology enhancements, additional talent, and market expansion to support our growth, striking a balance between growing our earnings and investing for the future. Our tax rate was relatively consistent with the prior quarter and was up on a year-over-year basis, due primarily to a greater mix of taxable income to tax-exempt income from our municipal bond portfolio and BOLI. Our capital ratios remain strong as we continue to generate significant earnings. We purchased 566,000 shares in the fourth quarter and a total of 1,530,000 shares during 2021. This represented 1% of outstanding shares in the fourth quarter and 3% for the year. We are completing this buyback with very little tangible book value dilution and a short earn-back period based on price levels so far, and this will in no way compromise our strong capital ratios. Overall, we feel good about the solid financial results for the quarter and look forward to continued improvement. I would like to turn the presentation over to Randy for a more detailed discussion of credit and the loan portfolio.
spk18: Thank you, Ben.
spk10: Good morning, everyone. As anticipated, in Q4, we realized continued improvement in our primary credit metrics and for 2021, reported significant improvement in non-performing asset totals, classified loan totals, and net charge-off activity. buoyed primarily by improved general economic conditions and higher energy prices. As slide 15 illustrates, nonperforming assets decreased 58 percent during 2021 to $33 million, or 0.58 percent of total assets, due primarily to upgrades and payoffs in the CNI and energy portfolios. Forty-nine percent of nonperforming assets are in the energy sector, which continues to be positively impacted by the higher commodity prices. Energy NPAs decreased 37%, or 9.8 million, during 2021. We expect the declining trend in total NPAs back closer to pre-COVID levels to continue in 2022. Also, at year-end 2021, we had a reserve to non-performing loan ratio of 185 percent. In Q4, we also experienced continued significant improvement in our classified loan totals. Classified loans decreased 36.6 percent during Q4 to 78.7 million and have decreased 72.5 percent during 2021. Classified totals in the energy portfolio have been reduced from a peak of $139 million in Q3 of 2020 to $21 million at year-end 2021, and now represent 27% of classified loans. Additional details about our energy portfolio are included in the supplemental portion of the earnings debt. Our classified loan to total capital and loan loss reserve ratio has decreased from a high of 43 percent at the end of Q3 2020 to 10.8 percent at year-end 2021. We expect this ratio to remain in this range in 2022. Moving to slide 16, net charge-offs declined significantly in 2021, ending the year at 12.9 million or 0.30 percent of average loans. charge-off activity decreased in each quarter of 2021, and in Q4, net charge-offs totaled 778,000, an annualized rate of 0.07% of average loans. We expect the lower net charge-off rate reported in the last three quarters of 2021 to better represent the anticipated net charge-off rate in 2022. Based on the continued improvement in non-performing assets, the additional significant decline in classified loan balances, and the further reduction in charge-off activity, in Q4, we released an additional $5 million of loan reserves. For 2021, we released a total of $4 million in reserves, with $11 million in provision in the first half of 2021 and $15 million in release during the second half of the year. Despite the additional reserve release in Q4, at year-end 2021, we reported a total allowance for loan losses of $58.4 million, or 1.37% of total loans. This was our last quarter reporting under the incurred loss model as we converted to CECL on January 1, 2022. As expected, the conversion to CECL had minimal impact on the required reserve level. In closing, we are pleased with the material improvement in our credit metrics in 2021, the diversity in our loan portfolio at the customer level, lending segment, and industry level, and believe that we are well positioned for future loan growth. I look forward to answering any questions you might have shortly. 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.
spk21: Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. Our first line is from Michael Rose with Raymond James. Your question, please.
spk09: Hey, good morning, guys, and thanks for taking my questions. I just wanted to start off on the – good morning – Yeah, I just want to start off on the loan growth outlook. So obviously good growth the past two quarters. That's like on average XPPP a little over 7%. You know, paydowns have been an issue for you and everybody else. But with Phoenix, you know, beginning to ramp up the, you know, the deepening of the presence in Dallas where you've made some hires more recently. Can you just talk to your expectations for what we should expect for kind of core loan growth as we move through the year? Thanks.
spk13: Yeah, Michael. You know, I feel really, really good about our ability to produce and the production we had in 2021. You know, we booked as many loans last year as we ever have. You know, what's hard to have insight into is what's going to happen as it relates to churn on the portfolio. But we started to see some great production out of the talent we've added in Texas in the fourth quarter, and Phoenix has really hit the ground running. So we expect both of those markets to contribute positively to loan growth. And, you know, one of our more mature markets, Kansas City, really had nice net growth in the fourth quarter as well. So we do feel good about it. We feel like – a range of 8% to 10% loan growth next year is absolutely within our reach, and a lot of it will be driven by maybe what happens with interest rates and particularly our real estate portfolio. The churn there has been fairly dramatic. The other benefit we'll have in 2022 is we won't have the drag of the PPP loans, and we've gotten our energy portfolio back into a range of that we feel comfortable with keeping that in that 5% to 7% of loans. And so we've gotten that down. So that was also a drag against net growth last year, as well as a little bit of cleanup in our loan portfolio. So without some of those headwinds, you know, we feel good about our opportunity to grow loans.
spk09: Very helpful. And then in the prepared remarks, you know, as it relates to fees, He talked about the expansion of the credit card products and then treasury services, which I assume is lumped into the other category, which had a nice ramp. Can you help just give some outlook for those businesses and if the momentum that you've had in fee income should continue? Thanks. Thanks.
spk13: Yeah, Michael, we believe it will. You know, the fourth quarter, a lot of our loan growth was CNI-focused, which really then feeds right into that credit card fee income and treasury fee income. And our treasury teams have done a great job selling those products, and our bankers are really focused on obtaining full relationships on new opportunities. So, we're going to continue to focus on that, and we still believe that there's opportunity to grow both of those products.
spk09: Okay, and then maybe finally for me, so Ben's comments on the expenses being relatively flat in the first quarter, can you just remind us, you know, what the impacts for, you know, the Phoenix expansion and, you know, I think you opened up a branch in Frisco and added some folks down there. Is that kind of all in the run rate? I know you said you'd comment on full year in April, but if you can just help us just understand what might be the puts and takes to expense growth off of that roughly slightly below $27 million a quarter run rate. Thanks.
spk07: Sure. Good morning, Michael. Yes, I expect for the first quarter non-interest expenses to be relatively consistent with fourth quarter. And big picture, as Mike said, if we're able to get net loan growth in the low single digits, we will likely have expense growth in a comparable range, slightly below that. So we're getting a little bit of leverage. We'll continue to invest in talent, and technology, and those are the primary line items where we'll see continued expansion for 2022. And as I mentioned, I'll give a little more detailed guidance here on our Q1 call.
spk08: Great. Thanks for taking all my questions. You're welcome.
spk21: Thanks, Michael.
spk22: Thank you.
spk21: The next question comes from Jennifer Demba with Thruway Securities. Please go ahead.
spk14: Thank you. Good morning. Good morning. Hi, Jennifer. I'm just curious about your buyback appetite as it sits right now.
spk07: Well, I'll start, Jennifer. It's Ben. Good morning. And Mike may want to add, you know, we did about $8 million against our $30 million approval in the quarter, and we continue to buy back every day. You know, we're at... Yesterday we were at 1.2 book. I haven't looked at the price here in the last few minutes. But we still remain in a range that's well below peers, and our stock continues to be underpriced. And so we will keep chipping away at that buyback here through 2022. Our main inhibitor is we really don't have a lot of volume. So we're buying as much as we can within the rules, and we'll keep doing that.
spk14: Can you just talk about the successes you've had in Phoenix specifically to date, where you are versus your plan, and what you think a balance sheet could look like in that market eventually?
spk13: Well, I think we're right on plan as it relates to our Phoenix strategy. We feel really good about where we're at. We've hired seven really talented bankers that have hit the ground running, and we believe that Phoenix is a billion-dollar-plus market in the next three to five years. And so we really feel like there's a lot of opportunity there. We've been able to attract talent. We've got a great location at 33rd and Camelback, which is right in the heart of the financial district in Phoenix. And so... We're very bullish on our opportunities there, and we believe our model and our strategy will work well there.
spk07: Jennifer, I would add, I think Mike mentioned Phoenix had really good loan growth in Q4, and we see that trajectory continuing, and I think we had previously shared, and our expectation is the same, that Phoenix will begin to break even within 2022 and has So far had a very good ramp up, a very good speed of ramp up that we expect to continue.
spk21: All right. And I'm not showing any further questions in the queue. I would like to turn the call back to Mike Maddox for – oh, I'm sorry. I think we have a couple more. Thank you so much. Our next question is from Matt Olney with Stephens. Please go ahead.
spk06: Hey, guys. Thanks for taking the question. Hi, Matt. Good morning. I want to ask about loan yields. It sounds like there was a nice tailwind maybe from some credit recoveries in the quarter. I think that's what Ben was talking about. in any dollar amount you can provide as far as how much that was in the fourth quarter? And could there be, I guess assuming there's lower amount of accruals in 2022, could we see some additional credit recoveries through NII? Thanks.
spk07: Sure, Matt. I might let Randy take the very end of that question, but I'll talk about Q4 and expectations. So Q4 NIM was propped up a little bit by loans coming off of non-accrual, something in the range of $1.3 million, which is probably 12 or 13 BIPs impact to our quarter. We don't expect, we can see what Randy says, we don't expect that kind of volume impact going forward now that we're in a more normalized credit range. Loan fees were impacted a little bit as we continue to have PPP forgiveness trail down, so that's pulling loan fees down, although they were a couple basis points higher in the quarter, really due to churn. As Mike mentioned, we continue to see a huge volume of repayments. So don't expect that big of a non-accrual impact going forward, and expect the other piece of the equation just to round out NIM guidance. is we do expect cost of funds to come down. I think we gave the detail of the FHLB prepayment, which was about six basis points. Going the other direction, we'll continue to have cost of funds come down in an amount similar to that.
spk10: Yep. And Matt, this is Randy. Just to add to that, we did see a nice decrease in non-performing assets. End of the year, about $33 million, and that is primarily loans on non-accrual. We have very little other real estate. And so we do expect in the first half of the year to see positive movement in those non-accruals, which could be accretive to interest funds. Moving forward, probably not at the same level as Ben mentioned as last year, but we do see some positive impact available there.
spk06: Okay, great. That's helpful. And then I also want to circle back on the topic of impact of higher interest rates and the impact to the bank. I think Ben said that the bank has a modest benefit to higher rates. I guess the last disclosure I can find, around the 100-base point shock was in the third quarter, and it was relatively neutral as far as the impact to the higher rates. Are there any updated disclosures you can provide or just maybe some commentary around the puts and takes of the higher rates and the impact to the bank?
spk07: Sure, Matt. It's Ben. So some broader comments on sensitivity. About two-thirds of our earning assets are floating assets, and we have around $800 million of loans with floors, and as I've mentioned, those floors, of course, have been very beneficial in the low-rate environment. Our sensitivity on a shock, a 100 basis point shock, is about 1.5% impact to net interest income, which would be about $2.5 million as we get beyond the first, call it, two, three, four, 25 basis point raises, we'll get past those floors and that will expand significantly. Our biggest impact, we believe, in the near term will be what you've heard everybody else say, which is we will lag on deposit rates increases as best we can. We're certainly not going to Compromise relationships with our clients. Our business is built on that, but we do believe there's some opportunity to lag there. We have a lot of liquidity that our intention, of course, is to lend out as much as we can and believe that will support a lot of our growth going forward.
spk06: Okay, that's helpful, Ben. So $800 million of loans at the floors today, and obviously we'll get some of that back as the Fed moves higher. Right. Are there any loans today that are not impacted by floors that you will get the immediate benefit from?
spk07: Oh, yeah. We, of course, have some floating as well. The bulk of the portfolio is floating.
spk06: Can you disclose the dollar amount of the floating that will get the immediate benefit?
spk07: Yeah, I don't have that in front of me, Matt, but I'd be happy to get it for you.
spk05: We'll follow up with you, Matt. Yeah. Okay, great. Thank you, guys.
spk07: You're welcome. Thanks, Matt.
spk21: Thanks. Our next question comes from Brady Gailey with KBW. Your line is open.
spk02: Okay, thanks. Good morning, guys.
spk04: Good morning, Brady. i just wanted to make sure i heard something right so you guys are expecting you know eight to ten percent uh possible loan growth in 2022 and then ben i know you're not i'm going to give kind of official expense guidance but you talked about you know potentially expenses going up uh kind of the low single digit level off of the kind of 27 million dollar uh quarterly expense base did i hear that right um
spk07: Brady, I would say expenses will go up in the high single-digit level. If you take, call it $27 million or $26.7 million, and you annualize that for four quarters, that would equate to about a 9% expense growth rate year over year, and I think that's right in the range of our expectation, subject to the revenue growth comments that Mike made.
spk04: Okay, got it. And then I know you guys invested more in Texas. You have Phoenix now online and running. Are there any other possible new markets or new states that you're eyeing to expand in, or are you kind of happy with what you have at this point?
spk13: No, Barry, we're always looking for opportunities to grow and expand and We've talked in the past about the markets that we're interested in. There are more markets in Texas that we think we may have opportunities in over time. Denver is a market that we believe fits within our footprint and has the similar kind of growth characteristics that attract us. Our market expansion is going to be methodical and thoughtful, and it will really be people-driven. I'm always out there looking for opportunities, and we're very focused on we want to get our capital deployed. We've got a lot of capital, and we want to put it to work, but we also want to do it in a smart and thoughtful way.
spk04: And then I know over prior years you guys have somewhat entertained the idea of of M&A, you guys acquiring smaller banks. I know your currency isn't really strong enough to make that map work great at this point. Is it safe to assume that M&A is kind of off the table for you guys right now, or is it still a possibility?
spk13: I think that's too strong to say it's off the table. Obviously, with our Stock price today, M&A would have to be really driven by a cash opportunity most likely. But we're still interested in finding partners who might be able to enhance what we're doing. And there are other product lines that could enhance, you know, our fee income. And so if it's a new market or a bank that has talent and products that would – be an enhancer to what we're doing, we'd certainly be open to that.
spk03: All right, great. Thanks, guys. Thank you.
spk21: Thank you. And I do not see any questions in the queue. I will turn the call back to Mr. Maddox for his final thoughts.
spk13: Again, hey, I just want to thank everybody for being on the call today. I also want to thank all of our employees for all the tremendous work they did in 2021. And again, I couldn't be more excited about our progress and where we're headed in 2022 and beyond. And so I wish you all well and stay healthy and go Chiefs. We'll talk to you soon.
spk21: Thank you. And with that, we conclude our program. Thank you for participating, and you may now disconnect. Thank you. Thank you.
spk01: Good day and thank you for standing by.
spk21: Welcome to the Cross First Bank Shares Q4 and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to the Director of Investor Relations, Heather Worley. Please go ahead.
spk19: Good morning, and thank you for joining us today for the Cross First Bank Shares fourth quarter and full year 2021 earnings conference call. I'm Heather Worley, Director of Investor Relations. Before we begin, please be aware this call will include forward-looking statements that are based on current expectations of future results or events. Forward-looking statements are subject to both known and unknown 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. Statements made on this call should be considered together with the cautionary statements and other information contained in today's earnings release, our most recent annual report on Form 10-K, and in subsequent filings with the SEC. Our speakers for the call today are Mike Maddox, President and CEO, Ben Klaus, CFO, and Randy Rapp, Chief Risk Officer and Chief Credit Officer. At the conclusion of our prepared remarks, our operator, Carmen, will facilitate a Q&A session. At this time, I would like to turn the call over to Mike, who will begin on slide four of the webcast. Mike?
spk13: Thank you, Heather. Good morning and thank you for joining us today as we discuss our fourth quarter and full year 2021 results. I must admit, we feel as good about our last 13 months as the Kansas City Chiefs do about the last 13 seconds Sunday night. As we reflect on 2021, I think it's important to take a step back and look at our performance over the last few years. Since going public in August of 2019, much of the world, Our industry and our company has changed. One thing that has not changed is our focus on delivering extraordinary service, which fuels our growth. I'm very proud of the progress our team has made during the past two and a half years, delivering record performance. We produce growth in both revenue and earnings. As we expected, the substantial improvement in our credit quality puts us in a great position to continue on our growth trajectory. The success we've had would not have been possible without the hard work of our employees and their dedication to providing exceptional service to our clients. The cross-verse culture and business model are differentiators that help us attract talent and a competitive market. Our focus on our core values and our one team, one bank, shared vision mindset is working and will continue to guide us going forward. We accelerated our momentum in 2021 with record earnings and an all-time high level of operating revenue. We also marked a return to loan growth in the last half of the year, even with record paydowns related to low interest rates and extremely low cap rates on real estate after normalizing the impact of PPP loan reductions. Credit quality substantially improved to a level that we expect to maintain going forward. We also made progress this year in improving our deposit mix with significant growth in non-interest-bearing accounts. Our team meaningfully grew fee income, led by the expansion of our credit card product and treasury services. We were able to deliver record profitability, even with making investments and growth by expanding to Phoenix. 2021 also included supplemental investments in talent and technology to drive growth. We strengthened our technology strategy to enhance the digital experience for clients. In our view, it is imperative to make investments in digital solutions that deliver unparalleled client experience and revenue-generating opportunities. we are beginning the implementation phase of providing a unified digital platform for clients across all channels by partnering with Q2. Q2's platform gives us the opportunity to enhance our digital client experience. In addition, we continue to invest in bank-sponsored FinTech funds, so we are at the forefront of developing technologies as they emerge for our bank and for our clients in the future. Even the best technology is not a substitute for extraordinary personal service. Adding top-tier talent remains a primary focus for us as a driver for our future growth. We completed a successful market expansion to Arizona with a seasoned banking team in Phoenix. We have continued to add high-caliber talent at all levels and enhanced our leadership team in 2021 with the hiring of a Texas regional president, Last but not least, we hired new executive leadership in technology, investor relations, and finance, all with tremendous industry experience. A huge part of our culture is our focus on employee engagement. Our engagement survey was taken by 94% of our employees and yielded record scores. CrossFirst was also named as one of the best places to work by the Kansas City Business Journal this past year. Lastly, we continue to focus on the difference we're making in our communities. We published our first annual impact report illustrating our connections and dedication to the communities where we live and work. We want to make a difference, and our employees do a great job of volunteering their time to help others. I couldn't be more proud of their efforts. Beyond the financial performance highlights I mentioned that Ben will cover in more detail, we effectively executed on our strategic stock buyback initiative to take advantage of our current stock price during the fourth quarter. The generation of consistent earnings will better position us to produce greater total shareholder return going forward. Our fourth quarter was a great capstone to the year with several accomplishments across measures of financial performance, credit quality, improvement, loan growth, talent additions, and a more robust focus on technology. As we look forward to 2022, we remain confident in our proven technology-focused branch-light business model. We are strategically positioned to continue to produce exceptional results. The investments we are making today in people and technology will prepare us for the future. I am proud of the outstanding team at Cross First, and I am incredibly excited about our future. Now I'll hand the call over to Ben to cover the financial results in more detail. Thanks, Mike, and good morning, everyone.
spk07: As Mike indicated, we had a great quarter and a great year, with net income on a year-to-date basis of $69.4 million, or $1.33 earnings per diluted share. For the quarter, we earned $20.8 million, or $0.40 earnings per diluted share. This quarter included continued significant improvement in credit quality, and we released an additional $5 million of reserves. We also continued our ability to grow loans with a 6.6% annualized growth rate, excluding the impact of PPP loans in the fourth quarter. 2021 was a significant milestone as we continued our impressive five-year trend of growth in pre-tax, pre-provision earnings and our five-year growth trend in operating revenue, with 2021 marking a high in both categories. Quarterly return on average assets was 1.50%, and return on average equity was 12.57%. These ratios were impacted by the release of reserves in both the third and fourth quarters. For the year, return on average assets was up from 0.24% in 2020 to to 1.24% in 21. And return on average equity was up from 2.05% in 20 to 10.84% in 2021. We are excited to see these return rates continue to improve as a result of our earnings momentum driven by credit improvement and execution of our strategy. Turning to slide 10, Our interest income in the fourth quarter was $49.2 million, which increased primarily due to credit improvement and incremental loan fees, as average loan balances were flat quarter over quarter due to growth being partly offset by the continuing impact of PPP loan forgiveness. Our remaining PPP loan balance was $65 million at the end of the quarter, with $1.7 million in unearned fees yet to be recognized, which we expect to be spread over a few more quarters. Interest expense was up slightly for the quarter. We continue to have higher rate time deposits mature, which brought the deposit cost down for the quarter, but this was offset by repayment of some higher cost borrowings. We expect to realize savings from this going forward and expect cost of funds to decline in Q1 We continued our demand deposit growth this quarter, ending the quarter with 25% of deposits in non-interest-bearing accounts. Net interest margin was up for the quarter at 3.28% on a fully tax-equivalent basis, due primarily to increased interest income, as I mentioned. Expect margin to moderate in the first quarter in the absence of this quarter's credit improvement-driven impacts. Year over year, our margin was up slightly, with the cost of funds being significantly lower due to the rate environment and reductions in time deposits and borrowings. We are somewhat asset sensitive and see opportunity as rates rise to lag deposit rate increases and potentially enhance our margin going forward. We have benefited from floors on a significant portion of our loan portfolio during the low rate environment. and we have greater sensitivity as rates move above those floors. Non-interest income for the quarter was $4.8 million and improved significantly from third quarter. The prior quarter had a $6.2 million asset impairment charge as well as gains from sales of securities of $1 million. Absent these items, the fourth quarter had nearly $700,000 of growth in credit card income, continuing our trend there. Non-interest expenses for the quarter were $26.7 million up from the third quarter. Salaries and benefits increased $1.1 million due to build-out of the Phoenix market, adding to our teams in Texas, and higher incentive expenses. Other non-interest expenses increased primarily due to credit card costs, commensurate with the revenue increase I mentioned. I expect non-interest expense to be relatively flat into the first quarter, and I'll provide updated guidance for the year on our first quarter call. For the year, non-interest income grew $1.9 million, or 16%, compared to 2020. This was driven by a $3.6 million increase in credit card income, increased service charges of $1.8 million, increased bully income of $1.7 million, economic development incentives, and higher letter of credit fees. These increases were partially offset by the $6.2 million asset impairment charge in the third quarter of 21. Turning to slide 13, our efficiency ratio has continued to move into the low 50s. This is an extension of a multi-year trend in efficiency ratio improvement and an overall focus on managing expenses prudently while still supporting growth. We will continue to invest in technology enhancements, additional talent, and market expansion to support our growth, striking a balance between growing our earnings and investing for the future. Our tax rate was relatively consistent with the prior quarter and was up on a year-over-year basis, due primarily to a greater mix of taxable income to tax-exempt income from our municipal bond portfolio and BOLI. Our capital ratios remain strong as we continue to generate significant earnings. We purchased 566,000 shares in the fourth quarter and a total of 1,530,000 shares during 2021. This represented 1% of outstanding shares in the fourth quarter and 3% for the year. We are completing this buyback with very little tangible book value dilution and a short earn-back period based on price levels so far, and this will in no way compromise our strong capital ratios. Overall, we feel good about the solid financial results for the quarter and look forward to continued improvement. I would like to turn the presentation over to Randy for a more detailed discussion of credit and the loan portfolio.
spk18: Thank you, Ben.
spk10: Good morning, everyone. As anticipated, in Q4, we realized continued improvement in our primary credit metrics, and for 2021, reported significant improvement in non-performing asset totals, classified loan totals, and net charge-off activity, buoyed primarily by improved general economic conditions and higher energy prices. As slide 15 illustrates, nonperforming assets decreased 58 percent during 2021 to $33 million, or 0.58 percent of total assets, due primarily to upgrades and payoffs in the CNI and energy portfolios. Forty-nine percent of nonperforming assets are in the energy sector, which continues to be positively impacted by the higher commodity prices. Energy NPAs decreased 37%, or 9.8 million, during 2021. We expect the declining trend in total NPAs back closer to pre-COVID levels to continue in 2022. Also, at year-end 2021, we had a reserve to non-performing loan ratio of 185%. In Q4, we also experienced continued significant improvement in our classified loan totals. Classified loans decreased 36.6% during Q4 to $78.7 million and have decreased 72.5% during 2021. Classified totals in the energy portfolio have been reduced from a peak of $139 million in Q3 of 2020 to $21 million at year-end 2021, and now represent 27% of classified loans. Additional details about our energy portfolio are included in the supplemental portion of the earnings debt. Our classified loan to total capital and loan loss reserve ratio has decreased from a high of 43% at the end of Q3 2020 to 10.8% at year-end 2021. We expect this ratio to remain in this range in 2022. Moving to slide 16, net charge-offs declined significantly in 2021, ending the year at $12.9 million, or 0.30% of average loans. charge-off activity decreased in each quarter of 2021, and in Q4, net charge-offs totaled 778,000, an annualized rate of 0.07% of average loans. We expect the lower net charge-off rate reported in the last three quarters of 2021 to better represent the anticipated net charge-off rate in 2022. Based on the continued improvement in non-performing assets, the additional significant decline in classified loan balances, and the further reduction in charge-off activity, in Q4, we released an additional $5 million of loan reserves. For 2021, we released a total of $4 million in reserves, with $11 million in provision in the first half of 2021 and $15 million in release during the second half of the year. Despite the additional reserve release in Q4, at year-end 2021, we reported a total allowance for loan losses of $58.4 million, or 1.37% of total loans. This was our last quarter reporting under the incurred loss model as we converted to CECL on January 1, 2022. As expected, the conversion to CECL had minimal impact on the required reserve level. In closing, we are pleased with the material improvement in our credit metrics in 2021, the diversity in our loan portfolio at the customer level, lending segment, and industry level, and believe that we are well positioned for future loan growth. I look forward to answering any questions you might have shortly. 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.
spk21: Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. To withdraw the question, press the pound or hash key. Our first line is from Michael Rose with Raymond James. Your question, please.
spk09: Hey, good morning, guys, and thanks for taking my questions. Good morning, Michael. Good morning. Yeah, I just want to start off on the loan growth outlook. So obviously good growth the past two quarters. That's like on average XPPP a little over 7%. You know, paydowns have been an issue for you and everybody else. But with Phoenix, you know, beginning to ramp up the, you know, the deepening of the presence in Dallas where you've made some hires more recently. Can you just talk to your expectations for what we should expect for kind of core loan growth as we move through the year? Thanks.
spk13: Yeah, Michael. You know, I feel really, really good about our ability to produce and the production we had in 2021. You know, we booked as many loans last year as we ever have. You know, what's hard to have insight into is what's going to happen as it relates to churn on the portfolio. But we started to see some great production out of the talent we've added in Texas in the fourth quarter, and Phoenix has really hit the ground running. So we expect both of those markets to contribute positively to loan growth. And, you know, one of our more mature markets, Kansas City, really had nice net growth in the fourth quarter as well. So we do feel good about it. We feel like – A range of 8% to 10% loan growth next year is absolutely within our reach, and a lot of it will be driven by maybe what happens with interest rates and particularly our real estate portfolio. The churn there has been fairly dramatic. The other benefit we'll have in 2022 is we won't have the drag of the PPP loans, and we've gotten our energy portfolio back into a range of that we feel comfortable with, keeping that in that 5% to 7% of loans. And so we've gotten that down. So that was also a drag against net growth last year, as well as a little bit of cleanup in our loan portfolio. So without some of those headwinds, we feel good about our opportunity to grow loans.
spk09: Very helpful. And then in the prepared remarks, as it relates to fees, He talked about the expansion of the credit card products and then treasury services, which I assume is lumped into the other category, which had a nice ramp. Can you help just give some outlook for those businesses and if the momentum that you've had in fee income should continue? Thanks. Thanks.
spk13: Yeah, Michael, we believe it will. You know, the fourth quarter, a lot of our loan growth was CNI-focused, which really then feeds right into that credit card fee income and treasury fee income. And our treasury teams have done a great job selling those products, and our bankers are really focused on obtaining full relationships on new opportunities. So, we're going to continue to focus on that, and we still believe that there's opportunity to grow both of those products.
spk09: Okay, and then maybe finally for me, so Ben's comments on the expenses being relatively flat in the first quarter, can you just remind us, you know, what the impacts for, you know, the Phoenix expansion and, you know, I think you opened up a branch in Frisco and added some folks down there. Is that kind of all in the run rate? And then maybe I know you said you'd comment on full year in April, but if you can just, you know, help us just understand, you know, what might be the puts and takes to expense growth off of that, you know, roughly, you know, slightly below 27 million a quarter run rate. Thanks.
spk07: Sure. Good morning, Michael. Yes, I expect for the first quarter non-interest expenses to be relatively consistent with fourth quarter. And big picture, as Mike said, if we're able to get net loan growth in the low single digits, we will likely have expense growth in a comparable range, slightly below that, so we're getting a little bit of leverage. We'll continue to invest in talent and technology, and those are the primary line items where we'll see continued expansion for 2022. And as I mentioned, I'll give a little more detailed guidance here on our Q1 call.
spk08: Great. Thanks for taking all my questions. You're welcome.
spk21: Thanks, Michael.
spk22: Thank you.
spk21: The next question comes from Jennifer Demba with Thruway Securities. Please go ahead.
spk14: Thank you. Good morning. Good morning. Hi, Jennifer. Just curious about your buyback appetite. Is it fixed right now?
spk07: Well, I'll start, Jennifer. It's Ben. Good morning. And Mike may want to add, you know, we did about $8 million against our $30 million approval in the quarter, and we continue to buy back every day. You know, we're at... Yesterday we were at 1.2 book. I haven't looked at the price here in the last few minutes. But we still remain in a range that's well below peers, and our stock continues to be underpriced. And so we will keep chipping away at that buyback here through 2022. Our main inhibitor is we really don't have a lot of volume. So we're buying as much as we can within the rules, and we'll keep doing that.
spk14: Can you just talk about the successes you've had in Phoenix specifically today, where you are versus your plan, and what you think the balance sheet could look like in that market eventually?
spk13: Well, I think we're right on plan as it relates to our Phoenix strategy. We feel really good about where we're at. We've hired seven really talented bankers that have hit the ground running and And we believe that Phoenix is a billion-dollar-plus market in the next three to five years. And so we really feel like there's a lot of opportunity there. We've been able to attract talent. We've got a great location at 33rd and Camelback, which is right in the heart of the financial district in Phoenix. And so we're very bullish on our opportunities there, and we believe our model and our strategy will work well there.
spk07: Jennifer, I would add, I think Mike mentioned Phoenix had really good loan growth in Q4, and we see that trajectory continuing, and I think we had previously shared, and our expectation is the same, that Phoenix will begin to break even within 2022 and has so far had a very good ramp-up, a very good speed of ramp-up that we expect to continue.
spk21: All right, and I'm not showing any further questions in the queue. I would like to turn the call back to Mike Maddox for – oh, I'm sorry. I think we have a couple more. Thank you so much. Our next question is from Matt Olney with Stephens. Please go ahead.
spk06: Hey, guys. Thanks for taking the question. Hi, Matt. Good morning. I want to ask about loan yields. It sounds like there was a nice tailwind maybe from some credit recoveries in the quarter. I think that's what Ben was talking about. In any dollar amount you can provide as far as how much that was in the fourth quarter, and could there be, I guess assuming there's lower amount of accruals in 2022, could we see some additional credit recoveries through NII? Thanks.
spk07: Sure, Matt. I might let Randy take the very end of that question, but I'll talk about Q4 and expectations. So Q4 NIM was propped up a little bit by loans coming off of non-accrual, something in the range of $1.3 million, which is probably 12 or 13 BIPs impact to our quarter. We don't expect, we can see what Randy says, we don't expect that kind of volume impact going forward now that we're in a more normalized credit range. Loan fees were impacted a little bit, you know, as we continue to have PPP forgiveness trail down, so that's pulling loan fees down, although they were a couple basis points higher in the quarter really due to churn. As Mike mentioned, we continue to see a huge volume of repayments. So don't expect that big of a non-accrual impact going forward, and expect the other piece of the equation just to round out NIM guidance. is we do expect cost of funds to come down. I think we gave the detail of the FHLB prepayment, which was about six basis points. Going the other direction, we'll continue to have cost of funds come down in an amount similar to that.
spk10: And Matt, this is Randy. Just to add to that, we did see a nice decrease in non-performing assets. end of the year at about $33 million, and that is primarily loans on non-accrual. We have very little other real estate. And so we do expect in the first half of the year to see positive movement in those non-accruals, which could be accretive to interest moving forward. Probably not at the same level as has been mentioned as last year, but we do see some positive impact available there.
spk06: Okay, great. That's helpful. And then also I want to circle back on the topic of impact of higher interest rates and the impact to the bank. I think Ben said that the bank has a modest benefit to higher rates. I guess the last disclosure I can find around the 100 basis points shock was in the third quarter, and it was relatively neutral as far as the impact to the higher rates. Are there any updated disclosures you can provide or just maybe some commentary around the puts and takes of the higher rates and the impact of the bank?
spk07: Sure, Matt. It's Ben. So some broader comments on sensitivity. About two-thirds of our earning assets are floating, and we have around $800 million of loans with floors. And as I've mentioned, those floors, of course, have been very beneficial in the low-rate environment. Our sensitivity on a shock, a 100 basis point shock, is about 1.5% impact to net interest income, which would be about $2.5 million. As we get beyond the first, call it, 2, 3, 4, 25 basis point raises, we'll get past those floors, and that will expand significantly. significantly. Our biggest impact, we believe, in the near term will be what you've heard everybody else say, which is we will lag on deposit rates increases as best we can. We're certainly not going to compromise relationships with our clients. Our business is built on that, but we do believe there's some opportunity to lag there. We have a lot of liquidity that our Our intention, of course, is to lend out as much as we can and believe that will support a lot of our growth going forward.
spk06: Okay. That's helpful, Ben. So $800 million of loans at the floors today, and obviously we'll get some of that back as the Fed moves higher. Right. Are there any loans today that are not impacted by floors that you will get the immediate benefit from?
spk07: Oh, yeah. We, of course, have some floating as well. The bulk of the portfolio is floating.
spk06: Can you disclose the dollar amount of the floating that will get the immediate benefit?
spk07: Yeah. I don't have that in front of me, Matt, but I'd be happy to get it for you.
spk05: We'll follow up with you, Matt.
spk07: Yeah.
spk05: Okay. Great. Thank you, guys.
spk07: You're welcome.
spk21: Thanks, Matt. Thanks. Our next question comes from Brady Gailey with KBW. Your line is open.
spk02: Okay, thanks. Good morning, guys.
spk04: Good morning, Brady. I just wanted to make sure I heard something right. So you guys are expecting, you know, 8% to 10% possible loan growth in 2022. And then, Ben, I know you're not going to give kind of official expense guidance, but you talked about potentially expenses going up kind of the low single-digit level off of the kind of $27 million quarterly expense base. Did I hear that right?
spk07: Brady, I would say expenses will go up in the high single-digit level. If you take, call it $27 million or $26.7 million, and you annualize that for, Four quarters, that would equate to about a 9% expense growth rate year over year, and I think that's right in the range of our expectation, subject to the revenue growth comments that Mike made.
spk04: Okay, got it. And then I know you guys invested more in Texas. You have Phoenix now online and running. Are there any other possible – new markets or new states that you're eyeing to expand in, or are you kind of happy with what you have at this point?
spk13: No, Barry, we're always looking for opportunities to grow and expand, and we've talked in the past about the markets that we're interested in. There are more markets in Texas that we think we may have opportunities in over time. Denver's a market that we believe fits within our footprint and has the similar kind of growth characteristics that So, you know, our market expansion is going to be methodical and thoughtful, and it will really be people-driven. So, you know, I'm always out there looking for opportunities, and, you know, we're very focused on we want to get our capital deployed. We've got a lot of capital, and we want to put it to work, but we also want to do it in a smart and thoughtful way.
spk04: and then i know over prior years you guys have somewhat entertained the idea of m a you guys acquiring smaller banks um you know i know your currency isn't really strong enough to to make that map work great at this point so is it safe to assume that you know m a is kind of off the table for you guys right now or is it still a possibility
spk13: I think that's too strong to say it's off the table. Obviously, with our stock price today, M&A would have to be really driven by a cash opportunity most likely, but we're still interested in finding partners who might be able to enhance what we're doing, and we're There are other product lines that could enhance our fee income, and so if it's a new market or a bank that has talent and products that would be an enhancer to what we're doing, we'd certainly be open to that.
spk03: All right, great. Thanks, guys. Thank you.
spk21: Thank you. And I do not see any questions in the queue. I will turn the call back to Mr. Maddox for his final thoughts.
spk13: Again, hey, I just want to thank everybody for being on the call today. I also want to thank all of our employees for all the tremendous work they did in 2021. And again, I couldn't be more excited about our progress and where we're headed in 2022 and beyond. And so I wish you all well and stay healthy and And go Chiefs. We'll talk to you soon.
spk21: Thank you. And with that, we conclude our program. Thank you for participating, and you may now disconnect.
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