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spk22: Good morning and welcome to the Cross First Bank Shares fourth quarter and full year 2022 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 one on your telephone keypad. To withdraw your question, please press store then two. Please note this event is being recorded. I would now like to turn the conference over to Heather Worley. Please go ahead.
spk20: Good morning and welcome to Cross First Bank Shares fourth quarter and full year 2022 earnings conference call. I'm Heather Worley, Managing Director, Investor Relations. Before we begin, please be aware this call will include forward-looking statements, including statements about our business plans, the impact of the acquisition of Central, expansion and growth opportunities, 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. This presentation will include remarks regarding the fourth quarter and full year results 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, Andrea, 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 presentation. Mike?
spk16: Thank you, Heather. Good morning, everyone, and thank you for joining us to discuss Cross First's fourth quarter and full year 2022 operating results. 2022 was our best year on record by a number of different measures. As we turn to 2023, we are well positioned to build on our success and optimize our investments that we've made in 2022 that will shape our future growth and expansion. We reported $17.9 million in adjusted net income for the quarter and $68.6 million in adjusted net income for the year. This equates to an adjusted earnings per share of $1.37 for the year. CrossFirst had an incredible quarter with the closing of our acquisition of Central, launching our new digital banking platform, and tremendously strong organic balance sheet growth. we grew loans by 26% for the year, with 17% of that growth being organic. From the time of our initial public offering in August of 2019 until today, we have operated through unprecedented times. We've all lived through a pandemic, supply chain challenges, and the largest rise in inflation for decades. Despite the unique operating environment, we have made dramatic improvement as a company. We have grown our balance sheet by $1.7 billion, or over 33%. This is even after we strategically shrank our balance sheet in 2021 to improve our core funding and reduce our dependence on wholesale funding. Demand deposits have grown from 13% to 25% of total deposits, and our NIM has improved from 332 for 2019 to 350 for full year of 2022. We've had a tremendous loan growth across our markets, but most importantly, credit quality has substantially improved, with NPAs declining from 0.97% in 2019 to 0.2% as of the end of 2022. Operating revenue has grown to $210 million in 2022. That is an increase of $60 million, or more than 40%, from our total operating revenue in 2019. That increase has contributed to more than 100% improvement in earnings per share and taken our ROE from 5.38% to 11.11%. We have worked hard to deploy the capital we raised during the IPO through organic balance sheet growth, buybacks, and now a successful acquisition. Our business model has also significantly expanded and become more diverse. We have entered high-growth metro markets such as Frisco, Phoenix, Denver, and Colorado Springs. And we added and expanded industry verticals, including family office, financial institutions, SBA, residential mortgage, and franchise finance. Lastly, we have a young and talented management team that I believe has the capability to achieve our plans for the future to become a $10-plus billion institution. In short, we are better positioned today than we were when we went public, and I'm very proud of our team and very optimistic for our future. Turning to the most recent quarter, we have had several significant accomplishments, and we continue to make investments in the development of our people, our processes, and the technology necessary to help meet the banking needs of our clients and our communities. We are very excited to welcome all of the team members from Central with the closing of our acquisition in November. I'm extremely appreciative of the entire team for their dedication and commitment to completing this successful partnership. The culture fit we identified as the differentiator for success with this experienced team has proven to be a key driver of our ability to operate together seamlessly. We've already experienced growth in new markets as a result of delivering more capabilities that come with size and scale. We've also deployed the enhanced SBA and mortgage capabilities across our legacy markets. This transaction is immediately accretive for our shareholders, and Ben will cover more details of the transaction shortly. Not only did we complete a successful acquisition, but we also launched our new digital banking platform in the fourth quarter, providing enhanced online tools and resources for our clients. This marks the culmination of an initiative we started last year to evaluate our technology partnerships and drive to a best-in-class client experience. As I reflect on what defines CrossFirst, it starts with our people. As we previously discussed during 2022, we enhanced the leadership structure of our organization to position the bank for future growth. We have continued to invest in talent and feel strongly that we have the people in place to sustain strong organic growth and at the same time deliver a great experience for our clients. This is only possible if we maintain and build on our culture. We were once again recognized as the best place to work by the Kansas City Business Journal and received exemplary scores on our annual Gallup Q12 Employee Engagement Survey. As we turn to 2023, we will continue to be opportunistic about the growth opportunities available to us. Having said that, we remain cognizant of the economic uncertainty as the Fed pursues their goal of reining in inflation. Maintaining great asset quality remains our number one priority, and it will not be compromised to facilitate growth. At Cross First, we operate as one team, regardless of location or function. With increased pressure on talent, it is important for us to invest in the well-being of our people. Maintaining our world-class culture means ensuring we are not just recruiting but retaining our top talent. We strive to position ourselves not just for annual growth but for the next decade of growth and performance improvement. That's where optimizing our operations and efficiency becomes so important as does deepening our community relationships. I'm excited about 2023 and the future of our company. And now I'd like to turn the call over to our president of Cross First Bank, Randy Rapp.
spk10: Thanks, Mike, and good morning, everyone. During Q4, we continued making enhancements to our leadership team with the promotion of Matt Mayer to president of our Kansas City market, the hiring of Cody Kaiser to serve as president of our Fort Worth expansion, the hiring of Mike Dombroski to lead our energy team and strategy, and the addition of Scott Page and his leadership team in Colorado and New Mexico with the central bank acquisition. As we executed our growth strategy, we added 27 net new producers in the quarter, with 25 being from the central acquisition, including SBA and residential mortgage. We believe the leadership and revenue generator additions position our company well to continue to attract top talent and clients for future growth and expansion. We maintained our focus on and investing in technology to enhance our client experience and drive efficiency throughout our business. In November, we successfully completed phase one of our digital banking conversion, migrating over 90% of our users. We are placing all new clients on the new platform and plan to convert the remaining 10% of legacy system users in Q1 of this year. We have made significant investments over the past several years and have a focus in 2023 of optimizing utilization of these systems and actively monitoring advancements that will benefit our clients or processes. Turning to Q4 highlights, we reported loan growth of $306 million, excluding the $389 million in loans acquired from Central. Organic loan growth on an annualized basis was 26% for the fourth quarter and 17% for the full year. Total loan growth for the year, including the central acquisition, was $1.1 billion, or 26%. Loan growth in Q4 continued to be balanced between CNI and commercial real estate and also geographically diversified, with the majority of the growth coming from our larger markets in Texas, Arizona, Kansas, and Missouri. Our community markets also reported increased loan activity. Total loans increased despite a $106 million decrease in the energy portfolio in 2022, which ended the year at $173 million. It is important to note that the majority of our growth in 2022 was with existing clients and sponsors, were borrowers with significant history with bankers and leaders we have hired. During 2022, and especially during the last half of the year, we were presented with many lending opportunities with more favorable structure and pricing than we had seen in recent periods, which contributed to our significant growth in Q4. During the quarter, average C&I line utilization was 45%, consistent with the prior quarter, and portfolio churn increased slightly and remains above the historical average level. Our loan portfolio remains diversified with a 42% concentration in commercial real estate and 47% concentration in CNI and owner-occupied real estate. Energy exposure now represents 3% of the total loan portfolio. The addition of the central loan portfolio did not significantly change the composition of the combined loan portfolios. There also remains good diversity within each of those portfolios with the highest CRE property type accounting for 16% of total CRE exposure and the largest industry segment in CNI being manufacturing at 11%. We continue to manage concentrations at the transaction level and adhere strictly to our underwriting standards to reflect the higher level of economic and interest rate uncertainty that exists in the markets today. For the quarter, average deposits increased 7% to $5.3 billion, up $116 million from the previous quarter, excluding the central acquisition. Over the past year, average total deposits have increased $746 million, or 16%, including $570 million from the central acquisition. Average non-interest-bearing deposits increased slightly during the quarter, to $1.1 billion and represent 25% of total deposits, up from 22% at the end of Q3. As discussed above, in Q4, we believe our new digital banking technology will enhance our deposit growth strategy. We remain highly focused on deposit generation and are launching a new DDA growth incentive program in Q1. Moving to credit highlights, for Q4, we reported a drop in non-performing assets of $5 million to $13.2 million, resulting in a non-performing asset to total asset ratio of 0.2%. The decrease was due primarily to paydowns in the energy portfolio. This ratio is down from 0.31% in Q3 and 0.58% at year-end 2021. Classified assets to capital plus combined reserves ended 2022 at 10%, down from 11.2% in Q3 and 10.8% at the end of 2021. For the quarter, we reported net recoveries of $300,000 and net charge-offs of $3.8 million for the year, resulting in a charge-off rate of eight basis points. As you will recall, we converted to CECL on January 1, 2022 and and have completed our first year using this reserve methodology. At 12-31-22, we reported an allowance for credit loss to total loan ratio of 1.15% and combined allowance for credit loss and reserve run commitments of 1.31%. We remain focused on strong portfolio monitoring and understand the importance of maintaining good credit metrics moving forward. We continue to have active dialogue with our clients and prospects about the impact of higher interest rates, inflation, and economic uncertainty on their businesses, and are closely monitoring our local, U.S., and global economies. Our portfolio has minimal consumer and direct consumer exposure, and we are fortunate to operate in many markets and states, continuing to show positive job creation and population migration. We believe the bank is well positioned for continued profitable loan and deposit growth. I will now turn the call over to our CFO, Ben Klaus, to cover financial results in more details. Ben?
spk11: Thanks, Randy, and good morning, everyone. As Mike indicated, adjusted net income expanded this quarter to $17.9 million, or $0.36 per diluted share. with gap net income of $11.9 million, or 24 cents per diluted share, which included several costs related to the acquisition that we closed on November 22nd. For the year, we earned $61.6 million on a gap basis or $68.6 million on an adjusted basis. I'd like to spend a few minutes on the purchase accounting impact for the deal before I review financial results, starting with the opening balance sheet, As Randy outlined, we purchased $399 million in loans and $570 million in deposits from Central. The acquisition also provided $225 million of the total deposit growth in non-interest bearing. The transaction resulted in $13 million of goodwill and $16.5 million in core deposit intangibles that will be amortized through non-interest expense over 10 years using some of the year's digits. As part of the purchase accounting adjustments, we recorded a discount on non-PCD loans of $6.7 million, which will be accreted into interest income over the expected life of those loans. We maintained some of the existing FHLB borrowings added from the deal and liquidated the investment portfolio. Turning to the P&L, the day one provision impact, including PCD accounting, was an additional $4.4 million of provision expense. Our non-interest expenses related to the deal were $3.6 million. Net of the tax impact, transaction-related costs, including the provision, reduced GAAP earnings by $5.9 million. I'll frame the rest of my comments around results adjusted to remove the purchase accounting impacts where applicable, which we believe is reflective of our core operating performance. We are on track to achieve our cost savings target and earnings accretion as we anticipated with the deal. Quarterly adjusted return on average assets was 1.15%, and adjusted return on average equity was 12.03%. These ratios were the result of improved core performance driven by balance sheet growth and expanding margin while continuing to invest for the future. We are executing our strategy to grow our balance sheet, improve performance, and gain leverage in our operations as we have now surpassed $6 billion and are well on our way to $7 billion in assets. We provisioned $2.3 million this quarter, excluding the purchase accounting. with loan growth being the primary driver. Our interest income in the fourth quarter increased by 26% from the prior quarter to $82.4 million. This was driven by rate increases and significant loan growth in the quarter. As a reminder, interest income for the third quarter included a $1 million pickup from a loan returning to accrual status, which is masking an additional $1 million of improvement to the run rate in the fourth quarter. Our average loan balances were up 8% quarter over quarter, and average loan yield was up 85 basis points. Interest expense was up $12.5 million for the quarter as we increased deposit rates to drive funding deployed for loan growth. As Randy noted, our percentage of demand deposits increased to 25% this quarter, with some being related to the added liquidity of the acquisition in addition to organic growth. Our cost of funds was 2.05% for the quarter. Our total deposit beta against the FOMC increases this year remained about 50 through fourth quarter, in line with our expectations. We will target a beta of 50 in 2023 with the assumption that rates will move upward this year by 50 to 75 basis points and remain elevated in the near term. Net interest margin was up to 3.61% on a fully tax equivalent basis. We expect margin to remain in the range of 355 to 365 for the start of 2023. with an assumed slowdown in the trajectory of interest rate increases. We anticipate that competition for deposits will continue into 23 as clients seek higher yields. Our balance sheet has moderate sensitivity, with 70% of our loans repricing or maturing over the next 12 months, with much of that being in the first 90 days. Turning to non-interest income, which was $4.4 million for the quarter, It increased 15%, due primarily to higher service charge income and some gains on bond sales. Credit card income was steady this quarter, and we remain focused on increasing credit card transaction volume. Adjusted non-interest expenses for the quarter were $32.9 million and increased $4.5 million from Q3. About half of that increase related to additional volume from the acquisition with more employees, a larger footprint, and more client accounts. The remainder of the increase was driven by higher incentives, some modest headcount growth, and increased loan-related costs. We anticipate non-interest expense to be in a range of $37 to $38 million for the first quarter. We will continue to manage our cost base to be well within our amount of revenue expansion to promote continued earnings growth and operating leverage. We will have some amount of elevated costs through the first quarter as we continue to integrate people and systems. Our adjusted efficiency ratio was 55% for the quarter as we closed our acquisition and continued to invest in new markets and technology. We expect to manage that into the lower 50s through 2023 as we finish the integration of Central and scale our investments in new markets and verticals that Mike outlined. Our tax rate was 21.9% for the quarter, being a little elevated due to certain non-deductible merger costs and a higher mix of taxable income this quarter than with tax exempt income being flat while overall operating revenue was up over 9% from Q3. We expect the tax rate to remain in a range of 20 to 22% for 2023. Our capital ratios came down due to the transaction as planned, driving a portion of the improvement in our ROE. We remain well capitalized and expect strong earnings to further bolster our position. Unrealized losses declined $20 million in the quarter as longer-term interest rates came down. We repurchased 358,000 shares in the fourth quarter for $4.8 million, and we will be opportunistic about the share buyback. Even with robust organic loan growth this quarter, our loan-to-deposit ratio increased slightly to 95%, which was helped by the acquisition liquidity and deposit base. We are very focused on driving deposit growth for 2023 and are augmenting our incentives, as Randy mentioned. We also remain well below historical levels for wholesale funding, and we have significant capacity for borrowing or wholesale if needed. In summary, we had a successful fourth quarter and a very strong year. with our operating revenue and assets at all-time highs and credit quality being at its best since our IPO. Operator, we are now ready to begin the question and answer portion of the call.
spk22: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue.
spk21: At this time, we will pause momentarily to assemble our roster.
spk22: And our first question will come from Brady Gailey of KBW. Please go ahead.
spk17: Hey, thanks. Good morning, guys.
spk18: Good morning, Brady. Good morning.
spk17: But I wanted to start, I know Central closed kind of intra-quarter, but was there a material level of accretable yield that was realized in the fourth quarter and any sort of comments on your forecast for accretable yield in 2023?
spk11: Hey, good morning, Brady. It's Ben. The answer in short is no, there wasn't any significant impact for the year. They do have a little bit better NIM than we have historically, but not enough to move the needle, certainly in a month.
spk17: Okay, and then any sort of forecast for accretable yield in 2023, or do you think that'll still be minimal? I think pretty minimal. Okay. All right. And then another great loan growth quarter, even excluding the acquisition, I think loan growth was in the mid 20% range annualized. So very, very strong. How are you guys thinking about loan growth as we look to 2023?
spk16: Yeah, Brady, you know, it's, Obviously, we're trying to figure out what's going to happen with the economy, but we believe that we have another opportunity to have another good year of growth. I don't know that it's going to be at the levels that we saw in 22, but we expect loan growth to be high single digits to low double-digit loan growth this year. We're still pretty... bullish on the markets that we're in, and the economies in those markets still seem to be pretty strong. So, you know, we made a lot of investments in 22 that we're still scaling, you know, in Fort Worth and in Phoenix and in a couple verticals. So the other thing is, you know, in 2022, we grew those numbers, even though we shrank our energy portfolio by over 100 million. So we overcame that and had the growth. We don't anticipate that to be the case in 2023, and we're pretty excited about the energy space and the opportunity to have some moderate growth there.
spk11: Brady, it's Ben. I was just going to clarify. I think we have this all in the details of the release, but 26% loan growth, for the year, 17 without the acquisition. For the quarter, coincidentally, it's 26% organic without the acquisition.
spk17: Yep, okay. And then finally for me, you guys repurchased almost 5% of the company last year. But you've used up some of your excess capital in the buybacks and central, you know, used up some of it. How should we, I mean, the stock is still notably cheap here, so should buybacks continue in 2023?
spk16: The stock is ridiculously undervalued, in our opinion, and you should expect that we'll continue to be active buying our stock back if it continues to trade at values we don't believe fairly, you know, represent the value. So, Yeah, we will continue to be active in the buyback area.
spk17: Okay, great. Thanks, guys.
spk22: The next question comes from Andrew Leash of Piper Sandler. Please go ahead.
spk02: Hey, good morning, everybody. Hey, Andrew.
spk03: Hi, just a question here on margin and yield. I'm just curious, what was the blended yield on what was added in the quarter? And it looks like you had some good growth and not in the spring, but also in CDs. I'm curious, where are those CDs coming on and what's the term on those? Just trying to match assets and liabilities here.
spk11: Sure. Good morning, Andrew. It's Ben. You know, we're not a big CD shop. We're, of course, looking at what everybody else is doing and making sure we're competitive. I would say the rates we're offering have really been focused in the 12 to 18-month range. We haven't really been seeking money longer than that because of our view, you know, on rates potentially higher. Potentially coming down at some point, but we think that's likely after the next 18 months. And in regard to your other question, we're probably most competitive in money market for our client base, and that's really where we compete the most on price day-to-day and where we raise the most funds.
spk03: Gotcha. And then what's that rate right now?
spk11: On money market? Is that your question? Yeah.
spk03: Yeah, money market. And then, again, like where new loans come on to.
spk11: Oh, okay. Yeah. New loans I have here in front of me. Give me a second to find it. You know, rates have come up a lot. We're well into the sixes at this point for new loans, the upper sixes. Our loan base, you know, the entire base in the upper fives, which, of course, we have in the presentation. Gotcha.
spk03: And then just a question on the timing from the cost saves on the deal. Looks like expenses might be a little bit elevated here in the first quarter. and then come down after that. So I'm just curious on when do you think the full cost saves will be in the run rate?
spk11: Yeah, I think by second quarter we anticipate those will be in the run rate. You know, the biggest driver of that is our systems conversion, which we expect to happen at the end of first quarter in March. So we have some transition people and some, of course, manual processes ongoing until then. And at that point, we believe we'll have reached the full cost saves. For expense outlook, you know, for the year, as I mentioned in my comments, $37 to $38 million non-interest expense going into the first quarter. And I anticipate that to be relatively consistent through the year, as we will add some staff later in the year after we realize those savings at the beginning. Got it.
spk04: That's really helpful. I'll step back. Thanks. Thanks, Andrew. Sure.
spk22: The next question comes from Matt Olney of Stevens. Please go ahead.
spk09: Thanks. Good morning. I want to go back on the loan growth. Michael, I think you said high single, low double digits. You're in a handful of newer verticals and some newer markets. Any loan categories or geographies you think will be the main drivers of that growth this year?
spk16: Well, we've continued to see really strong growth out of Kansas City, Phoenix, and Texas. And I think energy has an opportunity to have some reasonable growth. But, you know, we've really seen steady growth out of all of our markets. And so, you know, we're just in some dynamic markets that are providing some opportunity. Randy, you may want to talk about segments.
spk10: Yeah. Hey, Matt, it's Randy. You know, as Mike said, we are seeing good growth across the platform and You referenced earlier, we've made investments in markets. You referenced Frisco, Fort Worth, that are just really starting to get going. And you look at Arizona, and they've had outsized growth and been very successful in that market. And we are excited to be in the Denver and Colorado Springs markets and think those also provide growth. Our sponsor finance group has reported good growth and has a very robust pipeline of He talked about energy. We're seeing really nice opportunities in the energy space with some of the best structure and pricing that we've seen in recent period. And we continue to grow our real estate portfolio, but being very selective in that space. But again, in our higher growth markets, they're still presenting some very nice real estate opportunities.
spk09: Okay. Sounds good. Appreciate that color. And then Going back to the margin, I think you gave us the guidance range for 1Q, the 355, 365. I guess the question is, if deposit competition remains intense, I'm curious if you expect weakness below that beyond the first quarter.
spk11: Well, Matt, absolutely. That's a big factor. The range I gave you, 355 to 365, is pretty consistent with where we sit today, so we're not anticipating a lot of change in that for 2023 as we see it so far. If we get a couple of rate increases, we do expect a couple basis points of potential margin expansion, you know, balance sheet being And as you noted, the headwind to that is can we maintain our deposit mix? As Randy and I mentioned in our comments, we're very much focused on that, and we will have our people focused on that through incentives for this year.
spk16: Matt, I'm really proud of the work the way the team maintained our mix in 2022, you know, we lived through a rapidly rising rate environment in 22. And we actually, you know, with the acquisition ended up growing DDA as a percentage of our deposits. And, you know, we're able to keep our deposit beta within, I think, a fairly reasonable range. So, you know, we're going to keep fighting in 23 and really, really focused on DDA growth, as I know everybody is, and we're doing some things from an incentive standpoint and strategy standpoint to continue to really grow DDA.
spk09: Okay. Thanks for the commentary. And then lastly on capital, I think coming into last year, I think one of your goals was to deploy a chunk of the excess capital. It looks like you accomplished that with the buyback, with the growth. organic and inorganic. I guess I'm thinking about the capital of 2023 that you're assuming the loan growth, high single to low double-digit loan growth. Do you expect to accrete capital ratios from here? I'm just trying to appreciate if there could be a need for external capital.
spk11: Yeah, we do, Michael, expect to accrete them from here through earnings. I'm sorry, Matt. We do expect it to accrete through earnings. And as we've modeled out the year, we believe our earnings growth will outpace our balance sheet growth as we built our model.
spk16: Matt, we don't have any sub-debt today. We've got some different levers that we could pull if we needed to go get some additional capital to support our growth.
spk08: Okay. Thanks, guys.
spk22: The next question comes from Michael Rose of Raymond James. Please go ahead.
spk07: Hey, good morning, guys. Hopefully you don't call me Matt, Ben. Hopefully you don't call me Matt, Ben.
spk06: I had already written down your name in anticipation of you being next.
spk07: I figured that was the case. Well, most of my questions have been asked and answered, but obviously I think one of the positive stories here has been on credit. The reserve is sitting here at 115 of loans. You know, non-performers have really worked their way down. I assume criticized and classifieds have trended in the right direction as well. But I think what I hear from some investors is, you know, there's some verticals out there that, you know, maybe, you know, could cause some concern, whether it be, you know, real estate, I think, is what we hear most often. And then I think what I hear about you guys is kind of an untested trend. you know, loan portfolio and a lot of growth over the past couple of years, both organic and inorganic. What would you say to those that maybe kind of doubt the performance and how can you help us get more comfortable with just credit in general? Thanks.
spk10: Yeah. Hey, Michael, it's Randy. Good question. We're very comfortable with our portfolio and our credit metrics. We've seen significant improvement in those metrics over the last three years. And one thing you said, there is a portion of our portfolio that has been through COVID and some unique economic times and performed well. I think of lodging and how our sponsors stepped in and supported projects through that. And today, that portfolio has nothing criticized or classified. And so we feel good about the credit quality. We're closely monitoring the portfolio. We've had very successful third-party loan reviews and regulatory exams recently, which confirmed our grading accuracy and reserve levels. So we do have third parties also looking at those portfolios closely. At the reserve level, in our conversion to CECL, we did complete our first year. And like the other institutions, we've been making sure we learn how CECL acts in different environments. But when we close the year, our total reserve is a 1.31. We feel very adequately reserved at that level. And where we saw some of the increase in reserves in CECL was in the reserve for unfunded commitments area. And we don't think that will continue to increase at that same pace. And so, again, we look at our nonperformings at 20 basis points, our classified to capital at 10 basis points, and a reserve level of 131, we think the portfolio is really well positioned for future growth and also for some economic uncertainty. We spend quite a bit of time stress testing the portfolio, not only the real estate, but also the C&I portfolios. We continue to run those tests, and the portfolio holds up well even with additional rate increases. So we're adhering to our underwriting standards and think we're being very conservative in our underwriting tests. So overall, again, just feel good about the quality of the portfolio, although we're closely monitoring it.
spk16: Michael, I'd just add, Randy and the team have done a great job on the credit side. We've been telling investors and analysts that we feel good about our credit quality for three years now, and it's proving out that our credit quality is performing and our portfolio is performing well. You know, we went through an energy crisis, and that was something they looked at. And our energy portfolio, although we had a lot of grade migration, we had very little loss. And that portfolio has come back and is performing very well. We told everybody we would get our energy concentration down from where it was to that 5% to 7% range. It's at 3% today, and we think there's room there for us to grow. People talk about hospitality. Our hospitality portfolio performed very well, and it's not very big. I think we only have 16 credits or so in the hospitality space. There were strong sponsors. There were professional operators. And that portfolio, we have higher average daily rates than we had and better occupancy. And actually, those properties overall are performing at better levels than they were pre-pandemic. So... You know, we spend a lot of time looking at our portfolio and stress testing it and studying it. And we try to be really proactive in our credit management. And we will continue to do that. And as Randy said, we've had lots of external eyes on our portfolio over the last six months. And to an exam... they've come back and they've validated what we're doing and been very complimentary of the team and the job they're doing. So, you know, to your question, Michael, what can we say to them? All we can do is perform, and we're going to continue to perform, and we're going to really, really work hard to keep that quality and keep improving it.
spk07: I appreciate it. Maybe just one follow-up separate topic just on fee income. you know, it looks like ATM and credit interchange income has come down a little bit. Any explanation for that? And then looking forward, it looks like Central will add a little bit to the mix, but can you just remind us maybe some of the strategies you have in place to grow fee income and maybe what your intermediate to kind of longer term, you know, revenue mix would be? Thanks.
spk11: Sure, Michael. As a One headwind we've had on fee income, particular to credit card, is one large client with a very significant concentration who had a very big spike in their business related to COVID, and they have seen that come down all year long. we're finally at the point where they're near right-sized and the growth in our credit card portfolio is beginning to fulfill that concentration decline and overcome it. We've moved to an in-house platform and are at the tail end of converting all of our clients and believe that will be an additional contributor to our growth there. So we are adding net clients to our credit card portfolio. And as I mentioned in my in my comments driving additional transaction volume. So we think there is opportunity there for that to begin to turn now that we've worked our way through most of that concentration. Particular to the central deal, probably the most significant impact we'll see for 2023 is some fee income from their SBA business and to a lesser extent mortgage, which of course is pretty low volume right now. They used a model where they sold all of those loans and harvested gains on them almost exclusively without holding anything on the balance sheet. We will do the same to the extent it makes sense. At the current moment, like today, the gain on SBA sales is a little bit depressed, and so we likely will hold some of those loans on our balance sheet in the near term because we can. The yields are very attractive, near double digits on many of those, in particular in the guaranteed portfolio, and we'll simply make a cost-benefit decision you know, as we think about what the gain looks like in the future, which we expect will come back from its current depressed levels. But when that changes, there will be significant opportunity for fee income increases for us over our base. Perfect.
spk07: Thanks for taking all my questions. Sure. Thanks, Michael.
spk22: This concludes our question and answer session. I would like to turn the conference back over to Mike Maddox for any closing remarks.
spk16: Well, I want to thank everybody for joining us today. And I'm really proud of the team. And we're going to continue our focus on really driving long-term shareholder value. Very proud of our 26% growth in 22. We've added some great new markets. We've enhanced our technology platform. and we've really, really continued to improve and strengthen credit quality. I just believe we're so well positioned for 2023 and the opportunities it will provide, and we've got a great team in place and very excited to see what the future holds. Thank you all for joining us.
spk22: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect. Thank you. Thank you. Yeah. Good morning and welcome to the Cross First Bank Shares fourth quarter and full year 2022 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 one on your telephone keypad. To withdraw your question, please press store then two. Please note this event is being recorded. I would now like to turn the conference over to Heather Worley. Please go ahead.
spk20: Good morning and welcome to Cross First Bank Shares fourth quarter and full year 2022 earnings conference call. I'm Heather Worley, Managing Director, Investor Relations. Before we begin, please be aware this call will include forward-looking statements, including statements about our business plans, the impact of the acquisition of Central, expansion and growth opportunities, 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. This presentation will include remarks regarding the fourth quarter and full year results 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, Andrea, 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 presentation. Mike?
spk16: Thank you, Heather. Good morning, everyone, and thank you for joining us to discuss Cross First's fourth quarter and full year 2022 operating results. 2022 was our best year on record by a number of different measures. As we turn to 2023, we are well positioned to build on our success and optimize our investments that we've made in 2022 that will shape our future growth and expansion. We reported $17.9 million in adjusted net income for the quarter and $68.6 million in adjusted net income for the year. This equates to an adjusted earnings per share of $1.37 for the year. CrossFirst had an incredible quarter with the closing of our acquisition of Central, launching our new digital banking platform, and tremendously strong organic balance sheet growth. we grew loans by 26% for the year, with 17% of that growth being organic. From the time of our initial public offering in August of 2019 until today, we have operated through unprecedented times. We've all lived through a pandemic, supply chain challenges, and the largest rise in inflation for decades. Despite the unique operating environment, we have made dramatic improvement as a company. We have grown our balance sheet by $1.7 billion, or over 33%. This is even after we strategically shrank our balance sheet in 2021 to improve our core funding and reduce our dependence on wholesale funding. Demand deposits have grown from 13% to 25% of total deposits, and our NIM has improved from 332 for 2019 to 350 for full year of 2022. We've had a tremendous loan growth across our markets, but most importantly, credit quality has substantially improved, with MPAs declining from 0.97% in 2019 to 0.2% as of the end of 2022. Operating revenue has grown to $210 million in 2022. That is an increase of $60 million, or more than 40%, from our total operating revenue in 2019. That increase has contributed to more than 100 percent improvement in earnings per share and taken our ROE from 5.38 percent to 11.11 percent. We have worked hard to deploy the capital we raised during the IPO through organic balance sheet growth, buybacks, and now a successful acquisition. Our business model has also significantly expanded and become more diverse. We have entered high-growth metro markets such as Frisco, Phoenix, Denver, and Colorado Springs. And we added and expanded industry verticals, including family office, financial institutions, SBA, residential mortgage, and franchise finance. Lastly, we have a young and talented management team that I believe has the capability to achieve our plans for the future to become a $10-plus billion institution. In short, we are better positioned today than we were when we went public, and I'm very proud of our team and very optimistic for our future. Turning to the most recent quarter, we have had several significant accomplishments, and we continue to make investments in the development of our people, our processes, and the technology necessary to help meet the banking needs of our clients and our communities. We are very excited to welcome all of the team members from Central with the closing of our acquisition in November. I'm extremely appreciative of the entire team for their dedication and commitment to completing this successful partnership. The culture fit we identified as the differentiator for success with this experienced team has proven to be a key driver of our ability to operate together seamlessly. We've already experienced growth in new markets as a result of delivering more capabilities that come with size and scale. We've also deployed the enhanced SBA and mortgage capabilities across our legacy markets. This transaction is immediately accretive for our shareholders, and Ben will cover more details of the transaction shortly. Not only did we complete a successful acquisition, but we also launched our new digital banking platform in the fourth quarter, providing enhanced online tools and resources for our clients. This marks the culmination of an initiative we started last year to evaluate our technology partnerships and drive to a best-in-class client experience. As I reflect on what defines CrossFirst, it starts with our people. As we previously discussed during 2022, we enhanced the leadership structure of our organization to position the bank for future growth. We have continued to invest in talent and feel strongly that we have the people in place to sustain strong organic growth and at the same time deliver a great experience for our clients. This is only possible if we maintain and build on our culture. We were once again recognized as the best place to work by the Kansas City Business Journal and received exemplary scores on our annual Gallup Q12 Employee Engagement Survey. As we turn to 2023, we will continue to be opportunistic about the growth opportunities available to us. Having said that, we remain cognizant of the economic uncertainty as the Fed pursues their goal of reining in inflation. Maintaining great asset quality remains our number one priority, and it will not be compromised to facilitate growth. At CrossFirst, we operate as one team, regardless of location or function. With increased pressure on talent, it is important for us to invest in the well-being of our people. Maintaining our world-class culture means ensuring we are not just recruiting but retaining our top talent. We strive to position ourselves not just for annual growth but for the next decade of growth and performance improvement. That's where optimizing our operations and efficiency becomes so important as does deepening our community relationships. I'm excited about 2023 and the future of our company. And now I'd like to turn the call over to our president of Cross First Bank, Randy Rapp.
spk10: Thanks, Mike, and good morning, everyone. During Q4, we continued making enhancements to our leadership team with the promotion of Matt Mayer to president of our Kansas City market, the hiring of Cody Kaiser to serve as president of our Fort Worth expansion, the hiring of Mike Dombroski to lead our energy team and strategy, and the addition of Scott Page and his leadership team in Colorado and New Mexico with the central bank acquisition. As we executed our growth strategy, we added 27 net new producers in the quarter, with 25 being from the central acquisition, including SBA and residential mortgage. We believe the leadership and revenue generator additions position our company well to continue to attract top talent and clients for future growth and expansion. We maintained our focus on and investing in technology to enhance our client experience and drive efficiency throughout our business. In November, we successfully completed phase one of our digital banking conversion, migrating over 90% of our users. We are placing all new clients on the new platform and plan to convert the remaining 10% of legacy system users in Q1 of this year. We have made significant investments over the past several years and have a focus in 2023 of optimizing utilization of these systems and actively monitoring advancements that will benefit our clients or processes. Turning to Q4 highlights, we reported loan growth of $306 million, excluding the $389 million in loans acquired from Central. Organic loan growth on an annualized basis was 26% for the fourth quarter and 17% for the full year. Total loan growth for the year, including the central acquisition, was $1.1 billion, or 26%. Loan growth in Q4 continued to be balanced between CNI and commercial real estate and also geographically diversified, with the majority of the growth coming from our larger markets in Texas, Arizona, Kansas, and Missouri. Our community markets also reported increased loan activity. Total loans increased despite a $106 million decrease in the energy portfolio in 2022, which ended the year at $173 million. It is important to note that the majority of our growth in 2022 was with existing clients and sponsors. were borrowers with significant history with bankers and leaders we have hired. During 2022, and especially during the last half of the year, we were presented with many lending opportunities with more favorable structure and pricing than we had seen in recent periods, which contributed to our significant growth in Q4. During the quarter, average C&I line utilization was 45%, consistent with the prior quarter, and portfolio churn increased slightly and remains above the historical average level. Our loan portfolio remains diversified with a 42% concentration in commercial real estate and 47% concentration in CNI and owner-occupied real estate. Energy exposure now represents 3% of the total loan portfolio. The addition of the central loan portfolio did not significantly change the composition of the combined loan portfolios. There also remains good diversity within each of those portfolios with the highest CRE property type accounting for 16% of total CRE exposure and the largest industry segment in CNI being manufacturing at 11%. We continue to manage concentrations at the transaction level and adhere strictly to our underwriting standards to reflect the higher level of economic and interest rate uncertainty that exists in the markets today. For the quarter, average deposits increased 7% to $5.3 billion, up $116 million from the previous quarter, excluding the central acquisition. Over the past year, average total deposits have increased $746 million, or 16%, including $570 million from the central acquisition. Average non-interest-bearing deposits increased slightly during the quarter, to $1.1 billion and represent 25% of total deposits, up from 22% at the end of Q3. As discussed above, in Q4, we believe our new digital banking technology will enhance our deposit growth strategy. We remain highly focused on deposit generation and are launching a new DDA growth incentive program in Q1. Moving to credit highlights, for Q4, we reported a drop in non-performing assets of $5 million to $13.2 million, resulting in a non-performing asset to total asset ratio of 0.2%. The decrease was due primarily to paydowns in the energy portfolio. This ratio is down from 0.31% in Q3 and 0.58% at year-end 2021. classified assets to capital plus combined reserves ended 2022 at 10%, down from 11.2% in Q3 and 10.8% at the end of 2021. For the quarter, we reported net recoveries of $300,000 and net charge-offs of $3.8 million for the year, resulting in a charge-off rate of eight basis points. As you will recall, we converted to CECL on January 1, 2022 and and have completed our first year using this reserve methodology. At 12-31-22, we reported an allowance for credit loss to total loan ratio of 1.15% and combined allowance for credit loss and reserve run commitments of 1.31%. We remain focused on strong portfolio monitoring and understand the importance of maintaining good credit metrics moving forward. We continue to have active dialogue with our clients and prospects about the impact of higher interest rates, inflation, and economic uncertainty on their businesses, and are closely monitoring our local, U.S., and global economies. Our portfolio has minimal consumer and direct consumer exposure, and we are fortunate to operate in many markets and states, continuing to show positive job creation and population migration. We believe the bank is well positioned for continued profitable loan and deposit growth. I will now turn the call over to our CFO, Ben Klaus, to cover financial results in more details. Ben?
spk11: Thanks, Randy, and good morning, everyone. As Mike indicated, adjusted net income expanded this quarter to $17.9 million, or $0.36 per diluted share. with gap net income of $11.9 million, or 24 cents per diluted share, which included several costs related to the acquisition that we closed on November 22nd. For the year, we earned $61.6 million on a gap basis or $68.6 million on an adjusted basis. I'd like to spend a few minutes on the purchase accounting impact for the deal before I review financial results. Starting with the opening balance sheet, As Randy outlined, we purchased $399 million in loans and $570 million in deposits from Central. The acquisition also provided $225 million of the total deposit growth in non-interest bearing. The transaction resulted in $13 million of goodwill and $16.5 million in core deposit intangibles that will be amortized through non-interest expense over 10 years using some of the year's digits. As part of the purchase accounting adjustments, we recorded a discount on non-PCD loans of $6.7 million, which will be accreted into interest income over the expected life of those loans. We maintained some of the existing FHLB borrowings added from the deal and liquidated the investment portfolio. Turning to the P&L, the day one provision impact, including PCD accounting, was an additional $4.4 million of provision expense. Our non-interest expenses related to the deal were $3.6 million. Net of the tax impact, transaction-related costs, including the provision, reduced GAAP earnings by $5.9 million. I'll frame the rest of my comments around results adjusted to remove the purchase accounting impacts where applicable, which we believe is reflective of our core operating performance. We are on track to achieve our cost savings target and earnings accretion as we anticipated with the deal. Quarterly adjusted return on average assets was 1.15%, and adjusted return on average equity was 12.03%. These ratios were the result of improved core performance driven by balance sheet growth and expanding margin while continuing to invest for the future. We are executing our strategy to grow our balance sheet, improve performance, and gain leverage in our operations as we have now surpassed $6 billion and are well on our way to $7 billion in assets. We provisioned $2.3 million this quarter, excluding the purchase accounting, with loan growth being the primary driver. Our interest income in the fourth quarter increased by 26% from the prior quarter to $82.4 million. This was driven by rate increases and significant loan growth in the quarter. As a reminder, interest income for the third quarter included a $1 million pickup from a loan returning to accrual status, which is masking an additional $1 million of improvement to the run rate in the fourth quarter. Our average loan balances were up 8% quarter over quarter, and average loan yield was up 85 basis points. Interest expense was up $12.5 million for the quarter as we increased deposit rates to drive funding deployed for loan growth. As Randy noted, our percentage of demand deposits increased to 25% this quarter, with some being related to the added liquidity of the acquisition in addition to organic growth. Our cost of funds was 2.05% for the quarter. Our total deposit beta against the FOMC increases this year remained about 50 through fourth quarter, in line with our expectations. We will target a beta of 50 in 2023 with the assumption that rates will move upward this year by 50 to 75 basis points and remain elevated in the near term. Net interest margin was up to 3.61% on a fully tax equivalent basis. We expect margin to remain in the range of 355 to 365 for the start of 2023. with an assumed slowdown in the trajectory of interest rate increases. We anticipate that competition for deposits will continue into 23 as clients seek higher yields. Our balance sheet has moderate sensitivity, with 70% of our loans repricing or maturing over the next 12 months, with much of that being in the first 90 days. Turning to non-interest income, which was $4.4 million for the quarter... It increased 15%, due primarily to higher service charge income and some gains on bond sales. Credit card income was steady this quarter, and we remain focused on increasing credit card transaction volume. Adjusted non-interest expenses for the quarter were $32.9 million and increased $4.5 million from Q3. About half of that increase related to additional volume from the acquisition with more employees, a larger footprint, and more client accounts. The remainder of the increase was driven by higher incentives, some modest headcount growth, and increased loan-related costs. We anticipate non-interest expense to be in a range of $37 to $38 million for the first quarter. We will continue to manage our cost base to be well within our amount of revenue expansion to promote continued earnings growth and operating leverage. We will have some amount of elevated costs through the first quarter as we continue to integrate people and systems. Our adjusted efficiency ratio was 55% for the quarter as we closed our acquisition and continued to invest in new markets and technology. We expect to manage that into the lower 50s through 2023 as we finish the integration of Central and scale our investments in new markets and verticals that Mike outlined. Our tax rate was 21.9% for the quarter, being a little elevated due to certain non-deductible merger costs and a higher mix of taxable income this quarter. with tax exempt income being flat while overall operating revenue was up over 9% from Q3. We expect the tax rate to remain in a range of 20 to 22% for 2023. Our capital ratios came down due to the transaction as planned, driving a portion of the improvement in our ROE. We remain well capitalized and expect strong earnings to further bolster our position. Unrealized losses declined $20 million in the quarter as longer-term interest rates came down. We repurchased 358,000 shares in the fourth quarter for $4.8 million, and we will be opportunistic about the share buyback. Even with robust organic loan growth this quarter, our loan-to-deposit ratio increased slightly to 95%, which was helped by the acquisition liquidity and deposit base. We are very focused on driving deposit growth for 2023 and are augmenting our incentives, as Randy mentioned. We also remain well below historical levels for wholesale funding, and we have significant capacity for borrowing or wholesale if needed. In summary, we had a successful fourth quarter and a very strong year. with our operating revenue and assets at all-time highs and credit quality being at its best since our IPO. Operator, we are now ready to begin the question and answer portion of the call.
spk22: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue.
spk21: At this time, we will pause momentarily to assemble our roster.
spk22: And our first question will come from Brady Gailey of KBW. Please go ahead.
spk17: Hey, thanks. Good morning, guys.
spk18: Good morning, Brady.
spk17: Good morning. But I wanted to start, I know Central closed kind of intra-quarter, but was there a material level of accretable yield that was realized in the fourth quarter and any sort of comments on your forecast for accretable yield in 2023?
spk11: Hey, good morning, Brady. It's Ben. The answer in short is no, there wasn't any significant impact for the year. They do have a little bit better NIM than we have historically, but not enough to move the needle, certainly in a month.
spk17: Okay, and then any sort of forecast for accretable yield in 2023, or do you think that'll still be minimal? I think pretty minimal. Okay. All right. And then another great loan growth quarter, even excluding the acquisition, I think loan growth was in the mid 20% range annualized. So very strong. How are you guys thinking about loan growth as we look to 2023?
spk16: Yeah, Brady, you know, it's, Obviously, we're trying to figure out what's going to happen with the economy, but we believe that we have another opportunity to have another good year of growth. I don't know that it's going to be at the levels that we saw in 22, but we expect loan growth to be high single digits to low double-digit loan growth this year. We're still pretty... bullish on the markets that we're in, and the economies in those markets still seem to be pretty strong. So, you know, we made a lot of investments in 22 that we're still scaling, you know, in Fort Worth and in Phoenix and in a couple verticals. So the other thing is, you know, in 2022, we grew those numbers, even though we shrank our energy portfolio by over 100 million. So we overcame that and had the growth. We don't anticipate that to be the case in 2023, and we're pretty excited about the energy space and the opportunity to have some moderate growth there.
spk11: Brady, it's Ben. I was just going to clarify. I think we have this all in the details of the release, but 26% loan growth. for the year, 17 without the acquisition. For the quarter, coincidentally, it's 26% organic without the acquisition.
spk17: Yep, okay. And then finally for me, you guys repurchased almost 5% of the company last year. But you've used up some of your excess capital in the buybacks and central, you know, used up some of it. How should we, I mean, the stock is still notably cheap here, so should buybacks continue in 2023?
spk16: The stock is ridiculously undervalued, in our opinion, and you should expect that we'll continue to be active buying our stock back if it continues to trade at values we don't believe fairly, you know, represent the value. So, Yeah, we will continue to be active in the buyback area.
spk17: Okay, great. Thanks, guys.
spk22: The next question comes from Andrew Leash of Piper Sandler. Please go ahead.
spk02: Hey, good morning, everybody. Hey, Andrew.
spk03: Hi. There's a question here on margin and yield. I'm just curious, what was the blended yield on what was added in the quarter? And it looks like you had some good growth and not in the spring, but also in CDs. I'm curious, where are those CDs coming on and what's the term on those just trying to match assets and liabilities here?
spk11: Sure. Good morning, Andrew. It's Ben. You know, we're not a big CD shop. We're, of course, looking at what everybody else is doing and making sure we're competitive. I would say the rates we're offering have really been focused in the 12 to 18-month range. We haven't really been seeking money longer than that because of our view, you know, on rates potentially higher. Potentially coming down at some point, but we think that's likely after the next 18 months. And in regard to your other question, we're probably most competitive in money market for our client base, and that's really where we compete the most on price day-to-day and where we raise the most funds.
spk03: Gotcha. And then what's that rate right now?
spk11: On money market? Is that your question? Yeah.
spk03: Yeah, money market. And then, again, like where new loans come on to.
spk11: Oh, okay. Yeah. New loans I have here in front of me. Give me a second to find it. You know, rates have come up a lot. We're well into the sixes at this point for new loans, the upper sixes. Our loan base, you know, the entire base in the upper fives, which, of course, we have in the presentation. Gotcha.
spk03: And then just a question on the timing from the cost saves on the deal. Looks like expenses might be a little bit elevated here in the first quarter. and then come down after that. So I'm just curious on when do you think the full cost saves will be in the run rate?
spk11: Yeah, I think by second quarter we anticipate those will be in the run rate. The biggest driver of that is our systems conversion, which we expect to happen at the end of first quarter in March. So we have some transition people and some, of course, manual processes ongoing until then. And at that point, we believe we'll have reached the full cost saves. For expense outlook, you know, for the year, as I mentioned in my comments, $37 to $38 million non-interest expense going into the first quarter. And I anticipate that to be relatively consistent through the year, as we will add some staff later in the year after we realize those savings at the beginning. Got it.
spk04: That's really helpful. I'll step back. Thanks. Thanks, Andrew. Sure.
spk22: The next question comes from Matt Olney of Stevens. Please go ahead.
spk09: Thanks. Good morning. I want to go back on the loan growth. Michael, I think you said high single, low double digits. You're in a handful of newer verticals and some newer markets. Any loan categories or geographies you think will be the main drivers of that growth this year?
spk16: Well, we've continued to see really strong growth out of Kansas City, Phoenix, Texas. and I think energy has the opportunity to have some reasonable growth, but we've really seen steady growth out of all of our markets, and so we're just in some dynamic markets that are providing some opportunity. Randy, you may want to talk about segments.
spk05: Yeah.
spk10: Hey, Matt. It's Randy. As Mike said, we are seeing good growth across the platform, and You referenced earlier, we've made investments in markets. You referenced Frisco, Fort Worth, that are just really starting to get going. And you look at an Arizona, and they've had outsized growth and been very successful in that market. And we are excited to be in the Denver and Colorado Springs markets and think those also provide growth. Our sponsor finance group has reported good growth and has a very robust pipeline of He talked about energy. We're seeing really nice opportunities in the energy space with some of the best structure and pricing that we've seen in recent period. And we continue to grow our real estate portfolio, but being very selective in that space. But again, in our higher growth markets, they're still presenting some very nice real estate opportunities.
spk09: Okay. Sounds good. Appreciate that color. And then Going back to the margin, I think you gave us the guidance range for 1Q, the 355, 365. I guess the question is, if deposit competition remains intense, I'm curious if you expect weakness below that beyond the first quarter.
spk11: Well, Matt, absolutely. That's a big factor. The range I gave you, 355 to 365, is pretty consistent with where we sit today, so we're not anticipating a lot of change in that for 2023 as we see it so far. If we get a couple of rate increases, we do expect a couple basis points of potential margin expansion, you know, balance sheet being And as you noted, the headwind to that is can we maintain our deposit mix? As Randy and I mentioned in our comments, we're very much focused on that, and we will have our people focused on that through incentives for this year.
spk16: Matt, I'm really proud of the work the way the team maintained our mix in 2022, you know, we lived through a rapidly rising rate environment in 22. And we actually, you know, with the acquisition ended up growing DDA as a percentage of our deposits. And, you know, we're able to keep our deposit beta within, I think, a fairly reasonable range. So, you know, we're going to keep fighting in 23 and really, really focused on DDA growth, as I know everybody is, and we're doing some things from an incentive standpoint and strategy standpoint to continue to really grow DDA.
spk09: Okay. Thanks for the commentary. And then lastly on capital, I think coming into last year, I think one of your goals was to deploy a chunk of the excess capital. It looks like you accomplished that with the buyback, with the growth. organic and inorganic. I guess I'm thinking about the capital of 2023 that you're assuming the loan growth, high single to low double-digit loan growth. Do you expect to accrete capital ratios from here? I'm just trying to appreciate if there could be a need for external capital.
spk11: Yeah, we do, Michael, expect to accrete them from here through earnings. I'm sorry, Matt. We do expect it to accrete through earnings. And as we've modeled out the year, we believe our earnings growth will outpace our balance sheet growth as we built our model.
spk16: You know, Matt, you know, we don't have any sub-debt today. You know, we've got some different levers that we could pull if we needed to go get some additional capital to support our growth.
spk08: Okay. Thanks, guys.
spk22: The next question comes from Michael Rose of Raymond James. Please go ahead.
spk07: Hey, good morning, guys. Hopefully you don't call me Matt, Ben. Hopefully you don't call me Matt, Ben.
spk06: I had already written down your name in anticipation of you being next.
spk07: I figured that was the case. Well, most of my questions have been asked and answered. But, you know, obviously I think one of the positive stories here has been on credit. The reserve is sitting here at, you know, 115 of loans. You know, non-performers have really worked their way down. I assume criticized and classifieds have trended in the right direction as well. But I think what I hear from some investors is, you know, there's some verticals out there that, you know, maybe, you know, could cause some concern, whether it be, you know, real estate, I think, is what we hear most often. And then I think what I hear about you guys is kind of an untested trend. you know, loan portfolio and a lot of growth over the past, you know, couple of years, both organic and inorganic. What would you say to those that maybe kind of doubt the performance and how can you help us get more comfortable with just credit in general? Thanks.
spk10: Yeah. Hey, Michael, it's Randy. Good question. We're very comfortable with our portfolio and our credit metrics. We've seen significant improvement in those metrics over the last three years. And one thing you said, there is a portion of our portfolio that has been through COVID and some unique economic times and performed well. I think of lodging and how our sponsors stepped in and supported projects through that. And today, that portfolio has nothing criticized or classified. And so we feel good about the credit quality. We're closely monitoring the portfolio. We've had very successful third-party loan reviews and regulatory exams recently, which confirmed our grading accuracy and reserve levels. So we do have third parties also looking at those portfolios closely. At the reserve level, in our conversion to CECL, we did complete our first year. And like the other institutions, we've been making sure we learn how CECL acts in different environments. But when we close the year, our total reserve is a 1.31. We feel very adequately reserved at that level. And where we saw some of the increase in reserves in CECL was in the reserve for unfunded commitments area. And we don't think that will continue to increase at that same pace. And so, again, we look at our nonperformings at 20 basis points, our classified to capital at 10 basis points, and a reserve level of 131, we think the portfolio is really well positioned for future growth and also for some economic uncertainty. We spend quite a bit of time stress testing the portfolio, not only the real estate, but also the C&I portfolios. We continue to run those tests, and the portfolio holds up well even with additional rate increases. So we're adhering to our underwriting standards and think we're being very conservative in our underwriting tests. So overall, again, just feel good about the quality of the portfolio, although we're closely monitoring it.
spk16: Michael, I'd just add, Randy and the team have done a great job on the credit side. We've been telling investors and analysts that we feel good about our credit quality for three years now, and it's proving out that our credit quality is performing and our portfolio is performing well. You know, we went through an energy crisis, and that was something they looked at. And our energy portfolio, although we had a lot of grade migration, we had very little loss. And that portfolio has come back and is performing very well. We told everybody we would get our energy concentration down from where it was to that 5% to 7% range. It's at 3% today, and we think there's room there for us to grow. People talk about hospitality. Our hospitality portfolio performed very well, and it's not very big. I think we only have 16 credits or so in the hospitality space. There were strong sponsors. There were professional operators. And that portfolio, we have higher average daily rates than we had and better occupancy. And actually, those properties overall are performing at better levels than they were pre-pandemic. So... You know, we spend a lot of time looking at our portfolio and stress testing it and studying it. And we try to be really proactive in our credit management. And we will continue to do that. And as Randy said, we've had lots of external eyes on our portfolio over the last six months. And to an exam... They've come back and they've validated what we're doing and been very complimentary of the team and the job they're doing. So, you know, to your question, Michael, what can we say to them? All we can do is perform, and we're going to continue to perform, and we're going to really, really work hard to keep that quality and keep improving it.
spk07: I appreciate it. Maybe just one follow-up separate topic just on fee income. you know, it looks like ATM and credit interchange income has come down a little bit. Any explanation for that? And then looking forward, it looks like Central will add a little bit to the mix, but can you just remind us maybe some of the strategies you have in place to grow fee income and maybe what your intermediate to kind of longer term, you know, revenue mix would be? Thanks.
spk11: Sure, Michael. As a One headwind we've had on fee income, particular to credit card, is one large client with a very significant concentration who had a very big spike in their business related to COVID, and they have seen that come down all year long. we're finally at the point where they're near right-sized and the growth in our credit card portfolio is beginning to fulfill that concentration decline and overcome it. We've moved to an in-house platform and are at the tail end of converting all of our clients and believe that will be an additional contributor to our growth there. So we are adding net clients to our credit card portfolio. And as I mentioned in my in my comments driving additional transaction volume. So we think there is opportunity there for that to begin to turn now that we've worked our way through most of that concentration. Particular to the central deal, probably the most significant impact we'll see for 2023 is some fee income from their SBA business and to a lesser extent mortgage, which of course is pretty low volume right now. They used a model where they sold all of those loans and harvested gains on them almost exclusively without holding anything on the balance sheet. We will do the same to the extent it makes sense. At the current moment, like today, the gain on SBA sales is a little bit depressed, and so we likely will hold some of those loans on our balance sheet in the near term because we can. The yields are very attractive, near double digits on many of those, in particular in the guaranteed portfolio, and we'll simply make a cost-benefit decision soon you know, as we think about what the gain looks like in the future, which we expect will come back from its current depressed levels. But when that changes, there will be significant opportunity for fee income increases for us over our base. Perfect.
spk07: Thanks for taking all my questions. Sure. Thanks, Michael.
spk22: This concludes our question and answer session. I would like to turn the conference back over to Mike Maddox for any closing remarks.
spk16: Well, I want to thank everybody for joining us today. And I'm really proud of the team. And we're going to continue our focus on really driving long-term shareholder value. Very proud of our 26% growth in 22. We've added some great new markets. We've enhanced our technology platform. and we've really, really continued to improve and strengthen credit quality. I just believe we're so well positioned for 2023 and the opportunities it will provide, and we've got a great team in place and very excited to see what the future holds. Thank you all for joining us.
spk22: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
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