CrossFirst Bankshares, Inc. (NASDAQ:CFB) Q1 2022 Earnings Conference Call April 19, 2022 11:00 AM ET
Company Participants
Heather Worley – Director, Investor Relations
Mike Maddox – President and Chief Executive Officer
Ben Clouse – Chief Financial Officer
Randy Rapp – Chief Risk and Chief Credit Officer
Conference Call Participants
Matt Olney – Stephens
Michael Rose – Raymond James
Jennifer Demba – Truist
Brady Gailey – KBW
Andrew Liesch – Piper Sandler
Operator
Hello and welcome to the first quarter 2022 Earnings Call for CrossFirst Bankshares Inc. All participants will be in a listen-only mode during the presentation. Please note even is being recorded. [Operator Instructions]
I’d now like to turn the call over to Heather Worley, Director of Investor Relations. Please go ahead.
Heather Worley
Good morning and thank you for joining us today for the CrossFirst Bankshares’ first quarter 2022 earnings conference call. I am 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 Clouse, CFO; and Randy Rapp, Chief Risk Officer and Chief Credit Officer. At the conclusion of our prepared remarks, our operator, Towanda, will facilitate our Q&A session.
At this time, I’d like to turn the call over to Mike Maddox. Mike?
Mike Maddox
Thank you, Heather. Good morning everyone and thank you for joining us today as we discuss our first quarter 2022 results. The first quarter was great, not only at the bank, but I’d be remiss if I didn’t give a shout out to my Kansas Jayhawks for winning the national championship. That was fun one for me.
Before we get into the numbers, I’d like to take a minute to talk about our strategic plan. We recently shared the highlights with our employees, and I’m excited to do the same with all of you today. Our plan for 2022 is focused on investing in talent and technology to drive responsible growth. The CrossFirst core values of character, competence, commitment, and connection combined with our one team, one bank shared vision mindset defines our course of our strategy. One team is about our people who are the foundation of what we do.
We are dedicated to recruiting the best talent and investing in their strengths and skills. This approach is at the heart of our culture and makes us highly desirable place to work. Last year, we were named one of the best places to work by the Kansas City Business Journal. And we’ve set a strategic goal this year to be recognized by Gallup as a Best Place to Work Company.
We believe that a strong and consistent focus on employee engagement enhances our culture and leads to increased customer satisfaction, which supports our growth objectives. Our commitment to employee development starts with identifying and leveraging the strengths of our employees and coaching them to their full potential.
We continue to explore different niches and verticals where we have the talent and experience to Excel. As a part of that effort, we recently announced the hiring of Bobby Oliver to lead our Restaurant Finance Group. He brings deep experience of providing customized banking solutions to companies in the restaurant space and will make a significant contribution to the bank. The recent addition of David Felan to lead our Texas strategy, the further development of our Phoenix team, and now adding Bobby, are a few examples of our commitment to investing in top talent. We are confident in the strength of the new hires we’ve made and their abilities to make an impactful contribution to our strategy, goals and overall results.
Our team knows growth without quality credit is not sustainable. And I’m proud of the improvements we’ve made in our credit profile and the framework that Randy and team have put in place. So, as we look at the broader economy, know that we’re keeping abreast of its changes and we’ll prudently manage our risk profile. We continue to watch the geopolitical disruption, growing inflation, continued supply chain challenges and the likelihood of additional rate hikes. These factors could dampen growth and slow the economy. We have ambitious objectives, but when we talk about growth, we know we must do so responsibly. That means we will manage risk appropriately by taking a balanced approach. This balance is key to how we build long-term value both as a company and for our shareholders.
One bank is about accelerating our transformation into a larger organization with organic loan and deposit growth, driving greater fee income, and looking to expand into new markets and new business verticals. Having the best talent and investing in personal relationships with our clients is critical. But we also know that more and more business is being done digitally As such, it is imperative we invest in technology to provide an exceptional client experience.
Today, we are fully engaged in the implementation of our technology strategy, which focuses on enhancing the digital experience for our clients. When completed later this year, we will have a unified digital platform across all channels. We’ve also invested in three bank sponsored FinTech funds to ensure we gain exposure to developing technologies, which could provide more solutions for our clients. Lastly, the shared vision of our strategy is a balanced approach to drive shareholder value.
We take seriously the role that we play in the overall health and wellbeing of our communities. I am so proud of the impact CrossFirst is making in all of our markets as evidenced in our first corporate Impact Report published last year. We will do more of the same this year as we continue to support our strategic partners to make a difference in our communities. I am confident that our strategy for 2022 and beyond of one team, one bank with a shared vision will guide us on our path to deliver for our clients, shareholders, communities, and employees.
Turning to this quarter’s performance. We continued our momentum with earnings of $16.8 million or $0.33 per share. We grew loans at an annualized 12% growth rate, excluding PPP forgiveness. We remained focused on the overall economy and intend to be prudent ahead of a potential for a slowdown. Credit quality remained strong with modest improvement to a level we expect to maintain going forward. Our team is doing an outstanding job of continuing to diversify revenue by growing fee income. We are dedicated to the expansion of our credit card products, international banking services and our full suite of treasury capabilities.
With another quarter of solid earnings, we continue to add to our capital position while providing return and investing in our future. We accelerated the pace of our stock buyback initiative to take advantage of our price during the first quarter, while making investments in technology and talent. We are actively evaluating the most attractive opportunities to deploy our capital, including M&A. We believe strongly in our proven organic growth model. However, we would consider M&A options that would allow us to enter new markets, get us greater scale in existing markets or augment our company through new lines of business with fee income products, which will further our ability to meet our customers’ financial needs.
We have a great team supporting dynamic markets. We are well-positioned for the future, and I could not be more excited about what our team can accomplish the rest of the year and beyond.
Now, I’ll hand the call over to Ben to cover the financial results in more detail.
Ben Clouse
Good morning, everyone. As Mike indicates, we had another solid quarter with net income of $16.8 million or $0.33 per share. We adopted CECL on January 1, with minimal conversion impact and saw improvement in credit quality with a small release of reserves of $625,000. Mechanically, the new CECL adoption impact goes through equity, with the biggest change being the addition of a reserve for unfunded commitments.
We started the year with strong loan growth, which was in line with our expectations. Quarterly return on average assets was 1.23%. And return on equity was 10.44%. These ratios were the result of strong core performance and were impacted slightly by the small release of reserves. We are pleased to see these performance ratios improve as a result of our earnings momentum driven by execution of our growth strategy.
Our interest income in the first quarter was $47.8 million, which decreased $1.4 million from fourth quarter. Fewer days in the quarter, a positive fourth quarter impact of loans that return to occurring status and headwinds from PPP fee, which continued to decline, all offset positive expansion of interest income from loan growth and deployment of liquidity. Average loan balances were up 2.7% quarter-over-quarter.
Interest expense was down for the quarter. We continued to have higher rate time deposits mature, which brought the deposit costs down for the quarter. As expected, our cost of funds declined primarily due to lower FHLB borrowing costs from last quarter’s prepayment. Our percentage of demand deposits was consistent, and we experienced seasonality from client tax payments. Looking forward, arising rate environment could impact the growth trajectory for non-interest bearing accounts, where our team is very focused.
Net interest margin was relatively flat for the quarter at 3.29% on a fully tax equivalent basis. We expect margin to expand in the rising rate environment, although deposit migration and some remaining pressure on loan pricing will be headwinds. We are asset sensitive and we see opportunities as rates rise to lag deposit rate increases, and potentially enhance our margin.
Over two-thirds of our earning assets reprice or mature over the next 12 months with much of that being in the first 90 days. With the first rate increase, we are now past more of the impact of loan floors, and we have greater sensitivity as rates move above those floors. We’ll also see continued roll-off of higher cost time deposits in the second quarter.
Non-interest income for the quarter was $4.9 million and improved 3% over fourth quarter. The improvement was driven by higher analysis fees and consistent credit card growth, which remained solid areas of expansion for us and a focus of our team. Non-interest expenses for the quarter were $27.7 million, up 3.7% from the fourth quarter. Salaries and benefits were the largest driver and increased $1.5 million. This was due to hiring for production and technology talent in a very competitive environment, annual merit increases and higher taxes and benefits due to incentive payouts this quarter, along with the resetting of tax and benefit limits at the beginning of the year.
We added four new producers in the quarter, in addition to four added during the fourth quarter. These increases were partially offset by lower legal costs and loan recoveries. Payroll taxes will moderate. And the run rate by the end of the quarter was in line with our expectations. We anticipate non-interest expense to be in a range of $27.5 million to $28.5 million per quarter for the rest of this year, subject to our ability to continue to find opportunistic hires in a very competitive environment and subject to revenue growth to support a higher cost base. We will continue to seek efficiency ratio improvement, and focus on managing expenses with a balance between growing earnings and investing for the future.
Our tax rate was 20% for the quarter and was down due to the impacts of stock-based compensation in the first quarter from the vesting of awards. We expect it to be in the range of 21% to 23% for the rest of the year. Our capital ratios remain strong, as we generated significant earnings. We repurchased 1.1 million shares in the first quarter. This represented 2% of outstanding shares. Our buyback of shares has little tangible book value dilution, and a short earned back period based on price levels so far, that will in no way compromise our strong capital ratios. We experienced a swing in our unrealized gains on the investment portfolio to a net unrealized loss, as long-term rates have increased.
Given our duration around five years, we don’t expect further movement unless there is additional change in the long end of the curve. We deployed some of our liquidity this quarter, which pushed up the loan to deposit ratio to 94%. Including our FHLB borrowings, we had a funding ratio of 90% and we have significant capacity for additional borrowing or wholesale funding if needed in addition to deposit growth to fund our loans. Overall, we’re pleased with the solid finance financial results for the quarter, and look forward to the rest of 2022.
I would like to turn the presentation over to Randy for a more detailed discussion of credit and the loan portfolio.
Randy Rapp
Thank you, Ben and good morning everyone. As Mike mentioned, in Q1, we reported a 3% quarter-over-quarter loan growth rate, excluding PPP balance changes were 12% on an annualized basis. Growth was centered primarily in the commercial real estate and C&I portfolios. PPP loans decreased $34 million during the quarter to $31 million.
The portfolio turnover rate decreased during the quarter, but remains at an elevated level compared to historical averages, illustrating the higher continued level of loan payoff activity due to low permanent fixed rates and market cap rates. As permanent interest rates increase, we expect this turnover rate to continue to decrease. C&I line utilization decrease during the quarter to 42.5% from 45.7% in Q1 of 2021. In Q1, our primary credit metrics remained relatively stable.
As slide 13 illustrates in Q1, we saw improvement in our classified loan totals. Classified loans decreased 6.8% during Q1 to $73.3 million. Classified totals into energy portfolio reduced 24% in Q1 to $16 million, and now represent 22% of total classified loans. Our classified loan to total capital and combined allowance for credit loss reserve ratio ended the quarter at 10.7%, and we expect this ratio to remain this range in 2022.
In Q1 nonperforming assets increase slightly to $35.6 million or 0.64% of total assets due primarily to a downgrade to non-accrual of a previously identified substandard loan in the C&I portfolio. 25% of nonperforming assets remain in the energy sector, which has been positively impacted by the sustained higher commodity prices. At the end of Q1, we had a combined allowance for credit losses to nonperforming asset ratio of 169%.
Moving to slide 14. Net charge-offs for the quarter were minimal at $1.1 million and well below the $8.2 million reported in the same quarter of 2021. Q1 net charge-offs on an annualized basis were 10 basis points and the trailing 12-month net charge-off rate was 13 basis points. We expect this rate to better represent the anticipated net charge-off activity for 2022.
As previously messaged, we adopted CECL on January 1st, 2022, the primary impact of the conversion related to establishing reserves for non-cancelable unfunded commitments, which added $5.2 million to the reserve level at conversion. The conversion to CECL increased the combined allowance for credit loss total by $3.4 million or 5.9%. At the end of Q1, we reported a combined allowance for credit losses of $60.1 million or 1.38% of total loans. The combined allowance includes the allowance for credit losses on loans of $55.2 million and reserve for unfunded commitments of $4.9 million. For the quarter, the bank reported a small release of reserves of $625,000.
In closing, we are pleased with our loan growth for the quarter and continued stability in our credit metrics and net charge-off activity. Our team worked diligently to prepare for the conversion to CECL, and we are pleased that the conversion occurred with minimal impact to our financial statements.
We continue to closely monitor the U.S. and global economic indicators, inflation rate, higher commodity prices and interest rates, potential supply chain disruption, and the effects of the war in Ukraine on our clients, markets and prospects as we evaluate our portfolio and new credit opportunities. 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.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions]
Our first question comes from the line of Matt Olney with Stephens. Your line is open.
Matt Olney
Hey, thanks. Good morning everybody.
Mike Maddox
Good morning.
Ben Clouse
Good morning, Matt.
Matt Olney
Wanted to start on the expense side and Ben, you gave us some good guidance there from a quarterly standpoint, but it sounds like there is some flexibility in that guidance based off opportunities from hiring and based off the rate environment. So, I guess, the question is, if we do get the, call it, 200 bps of higher Fed funds throughout the year that the market’s expecting, would that increase that range that you provided, or does that already consider a similar rate environment that assumes higher rates? Thanks.
Ben Clouse
Good morning, Matt. That range I gave would include what we’re all looking — what I think consensus is for the rate environment. And the point you reiterated is an important one. We’re not going to grow our expense base at the top end of that range, if we don’t see revenue growth to support that. So, Mike and I think about that as, those two things moving together, we had a little bit of noise in particular in the net interest income in the first quarter that pushed our ratios a little bit, but that range would include anticipated rate changes and our sensitivity.
Matt Olney
Okay. Thanks for that. And I guess, this is a follow-up to that response Ben, what are the key metrics that you’re looking for with respect to the positive operating leverage? I mean, you mentioned you don’t want expenses to get ahead of the revenues. So, is it specifically the percent revenue growth versus expense growth year-over-year, or what is it that you’re kind of guiding you with respect to maintain the positive operating leverage?
Ben Clouse
It’s definitely revenue growth and expense growth, and making sure those move appropriately toward one another, but we’re also very focused on the efficiency ratio. It’s up this quarter, because wages were up and revenue didn’t move a whole lot because our growth was clouded a little bit by non-accrual changes. But we’re very focused on continuing to find improvement to our efficiency ratio and to gaining some leverage as we continue to grow the bank.
So, I think those are the two key that I would point to efficiency ratio and then as you said, making sure expense growth is an outpacing revenue growth.
Mike Maddox
Matt, we want to keep an efficiency ratio down mid to low 50s and it’s going to have some ups and downs as we invest in growth. And we also want to be entrepreneurial enough to invest in opportunities to grow the company. And we also want to get our capital deployed. We’ve got quite a bit of excess capital that we want to get deployed into growth. And so, some of the expense increase you see in the first quarter is related to some of that investment in growth and we are confident that the revenue will catch up with some of those investments.
For example, in Phoenix — we’ve made a pretty good investment in Phoenix and they hit profitability for the first time in March. So, we’re excited about their opportunity to continue to scale and be a positive impact on the bottom line.
Matt Olney
Okay. Thanks for that. And then, I guess, on that note, Mike, that 8% to 10% loan growth guidance for the year, just remind us, does that include or exclude the headwinds from the PPP?
Mike Maddox
We set 8% to 10%, excluding the PPP.
Matt Olney
Okay. Got it. And then, just lastly for me, I think the guide included the ACL ratio would maintain that 130 to 145 ratio for the year. I assume that compares to that 138 that we saw this year. So, it sounds like we should not anticipate any material change in the allowance ratio. Is that that fair?
Randy Rapp
Hey, good morning, matt. This is Randy. Yeah, that’s fair. That’s the way I would look at it.
Matt Olney
Okay. I’ll get back in the queue. Thanks guys.
Heather Worley
Thanks Matt.
Operator
Thank you. Our next question comes from the line of Michael Rose with Raymond James. Your line is open.
Michael Rose
Hey, good morning, everyone. Thanks for taking my questions. Just to follow-up on the loan growth outlook. So, obviously, if you annualize this quarter, it’s kind of above that range. And obviously, you have Phoenix, as you just mentioned, recent profitability, new Restaurant Franchise Finance Group, further growth in Texas.
I guess, what are the — those are the pluses. What would be kind of the negatives? Is it paydowns? Is it just general cautiousness? Because it does seem like the guide is just potentially a little conservative. Thanks.
Mike Maddox
Well, we’re still fighting churn in the real estate portfolio with low long-term rates and low cap rates. We’re still seeing that. Line utilization is still below historical levels. It’s improved some, but it’s got a ways to go. We’ve also been prudent in certain sectors of our portfolio, like we’ve continued to work on rationalizing our energy portfolio as an overall piece of the pie.
And so, there is some headwinds to growth and we don’t know what’s going to happen in the economy over the rest of the year. And there are a lot of red flags out there. And so, we want to be prudent. We think our model and the team we have, can still deliver that 8% to 10% growth despite maybe being in an environment that may or may not support outsized growth.
Michael Rose
Okay. That’s helpful. And then, maybe for Ben. Just if we exclude rate hikes, there’s obviously some pluses and potential negatives as you grow, just given where the loan to deposit ratio are, and adding some higher beta sources of funding. How should we think about kind of the nearer term kind of core margin here? I think, we can all do the math around what rate hikes do. But as we think about the core margin, if you can just delve into a little bit more of the puts and takes of what happens there. Thanks.
Ben Clouse
Sure, Michael. Yeah. As you said, rate increases are generally good for us and we’re asset sensitive like most banks of our size and scope. For us, we’re — we’ve spent a lot of time thinking about what our deposit beta will look like going forward. In the last rate cycle, we had a — or rate increase cycle, we had a much different deposit composition than we do today. I think, we are we are relatively conservative in our sensitivity modeling. And as I said last quarter, I’ll repeat, we believe we have some opportunity to lag deposit increases as the Fed brings up short-term rates and we’re working very, very closely with our client facing market leaders to do that in the right way and ensure we don’t impact client relationships in particular with a short-term focus. We’re taking a long-term focus.
With that said, the betas we’re using look a lot different because the composition of our portfolio is — our deposit portfolio is a lot different. With that said, overall, on non-maturity deposits, the betas we’re assuming are relatively consistent when you take into account the composition of the last rate cycle. But if you peel that back a little bit, we’re assuming lower betas, but we have much higher beta product composition than we did in the past. If that helps? It give a little color there.
Michael Rose
Yeah. Very much so. And then, one final question for me. I’m just trying to figure out the dollar amount that you guys repurchased the scores to see how much you have left. And then, given the stock is still at around one to a tangible, fairly low earn back, what the appetite may be as we move forward? And could you potentially look to do another program here just given you saw some excess liquidity. Thanks.
Ben Clouse
Sure. So, we expended $16.8 million in the quarter. On the buybacks, that’s 1.058 million shares. I think that figure might be in the deck, and so that works out that we have about 4.9 million of authorization left as of 3/31. So, we’ll seek another authorization for the board as this one ends. As you pointed out, our price to book value remains well in the range that we think buybacks continue to make sense and we continue to have an appetite to do that.
Michael Rose
Very helpful. Thanks for taking my questions.
Ben Clouse
Sure.
Mike Maddox
Thanks Michael.
Operator
Thank you. Our next question comes from the line of Jennifer Demba with Truist. Your line is open.
Jennifer Demba
Thank you. Good morning.
Mike Maddox
Good morning.
Jennifer Demba
Just wondering if you could size up the market opportunity for the restaurant franchise business at this point? And are there any other lending lines that you’re looking at entering over the foreseeable future? Thanks.
Mike Maddox
Yeah. We believe there’s a substantial market there. And we already have about $63 million today in that space and we believe that over time that could be somewhere between $250 million and $0.5 billion over time contributor for us. So, Bobby is really experienced, and he is well connected in the industry. And I think combining him with the existing talent we have, we see a significant opportunity. And also, that also drives fee income and deposits and ancillary business that goes along with it.
We’re constantly evaluating other lines of business. And it’s really driven by our ability to find the right talent. And so, we don’t have anything immediate on the — in our plans. But whether it’s senior housing or equipment finance and some other things that we may look at over time.
Jennifer Demba
Right. And second — if I could ask one other question. What do you feel like — I know you feel very confident about asset quality over the near-term. But as rates go up, what areas of the portfolio you feel are most vulnerable at this point?
Randy Rapp
Hey, good morning, Jennifer. This is Randy. So, obviously, watching our commercial real estate portfolio as the rates increase, we’ve been stressed — stressing those assets individually and are underwriting pretty healthy. Anticipating a rise in interest rates. And one of the things we continue to see in the real estate portfolio is significant equity in projects, so 35%, 40% equity, which helped provide some buffer in a rising rate environment.
We’re also trying to be disciplined in that portfolio to stay more in the multifamily, industrial segments which continue to have quite a bit of growth and the lower level of the cap rate. So, we’re looking at that portfolio.
Another portfolio we think about is our EV leverage lending portfolio. By nature, those tend to carry a higher leverage position and can be susceptible to rate increases. But again, we’ve been stressing those for significant declines in EBITDA and significant declines in — increases in interest rates as we do our underwriting. So, those are a couple of segments of the portfolio that we’re watching closely.
Jennifer Demba
How big is the leverage loan portfolio at this point?
Randy Rapp
That portfolio is about $380 million. But again, that combines EV and leveraged lending. So, of that probably half of that meets the regulatory definition of a leveraged loan.
Jennifer Demba
Thank you.
Operator
Thank you. Our next question comes from the line of Brady Gailey with KBW. Your line is open.
Brady Gailey
Hey, thanks. Good morning, guys.
Mike Maddox
Hey, Brady.
Brady Gailey
So, I’m just wondering your guidance on the loan growth side and on the expense side, how much additional hiring do you need to do? And I’m looking here on slide nine, you talk about these potential target markets, you have seven or eight of them here. Does that guidance include expansion into additional markets, or is that kind of the markets you’re already in?
Mike Maddox
No. The guidance we’ve given today would just include the markets that we’re in today. And we believe that we can deliver that growth with the team that we have on the field. So, if we make further investments, or we expand to new markets, we think we’ll do better. But right — the guidance we’re providing is just on our existing markets with our existing team.
Brady Gailey
Okay. Right. And then, to circle back to share repurchases. You repurchased about 2% of the company this quarter. Is there any reason why that would slowdown for the rest of the year? Or do you think the activity we saw in the 1Q could be what we could see throughout the rest of this year?
Mike Maddox
Well, Brady, there would really only be two reasons. I think that would slowdown. One, if our share price went way up, which I hope that happens. The other thing would be if we have something going on that precludes us from being in the market as a public company. That would be the only other reason that occasionally happens as we run our business. But borrowing those two things will continue to be active — as active as we can in the buyback.
Brady Gailey
Okay.
Mike Maddox
But Brady, we think as a real opportunity. I mean, with our stock price trading where it is, we see great value in it. And so, we think it’s a great opportunity for our shareholders to do that and we’ll continue to do it.
Brady Gailey
Yeah. I agree. That’s great to see. Finally, for me. Mike, you mentioned briefly some interest in M&A. I know it’s tough with your currency trade where it’s trading kind of right on top of tangible book value. Maybe just expand on what sort of opportunities would get you excited on the M&A side?
Mike Maddox
Yeah. With where our currency is trading today, M&A for us would certainly have to be cashed opportunities that we could leverage our capital that way. And we’re constantly looking for the right opportunities to partner with people who fit our culture and who fit in those markets that were desirable of entering over time. And so, again, M&A could provide us a new market opportunity.
If there was an opportunity to grow some scale in an existing market or there was a partner we could find that provided some product and opportunities that we could cross-sell across our franchise, those would be the driving forces. But it’s going to be driven by market and it’s going to be driven by talent and culture. And we want to make sure we maintain our branch light model. So, that also limits the universe a bit on partners that would be a good fit for us.
Brady Gailey
Got it. Thanks Mike.
Mike Maddox
Yeah.
Operator
Thank you. Our next question comes from the line of Andrew Liesch with Piper Sandler. Your line is open.
Andrew Liesch
Hey, good morning everyone. Thanks for taking the question. So, just a question on the new non-accrual C&I loan. I’m just curious what other details you can provide looks like related to like maybe industry or location. And is this more of a unique situation related to the borrower, or do you think this could be anything systemic for the mystery or a larger issue down the line?
Randy Rapp
Sure. Andrew, good morning. This is Randy. Happy to answer that. So, I can tell you that the — we took a slight charge on the credit in Q1. It is in the process of resolving and we expect it to be fully resolved late in Q2 or early Q3, and we expect to fully recover our remaining book balance. And given the sensitivity to the process right now, it’s pretty much what I can say about it. It is a unique credit. It is not a systemic issue. We don’t have other credits in that space.
Andrew Liesch
Got it. Alright. That’s very helpful. And then, how should we be looking at the securities portfolio right now. I’m guessing the decline in it — just resulted from the fair value mark, but are there plans to add more to it? Or is really the goal to take whatever liquidity you have and feel it in the loan growth?
Ben Clouse
Andrew, it’s Ben. Good morning. We’re taking a long-term view on our securities portfolio. You’re correct. Right, rising rates have caused some unrealized loss in our fixed income portfolio. It’s all fixed income. We like the flexibility that the AFS categorization offers, if we need that for funding or it’s very flexible for us to pledge for borrowing in particular with the FHLB.
I think, we’ll continue to add to that portfolio in proportion to the growth of our balance sheet. We are able to get much better yields right now. As rates have come up, we’re seeing munis beyond 4% from a tax equivalent yield perspective and mortgage backs around 3% or maybe as much as 3.25%. So, it continues to make sense for us and we don’t intend to make any major shifts strategically there with — in regard to the portfolio.
Andrew Liesch
Got it. You’ve covered all my other questions. Thanks so much.
Ben Clouse
Thank you, Andrew.
Heather Worley
Thank you, Andrew.
Operator
Thank you. [Operator Instructions]
We have a follow-up question from the line of Matt Olney with Stephens. Your line is open.
Matt Olney
Yeah. Just a follow-up on the M&A discussion.
Mike Maddox
Yeah.
Matt Olney
Mike, you gave some good thoughts around the strategic merits and kind of what the bank would consider. What about on the financial side? What are the guideposts that you lean on the most with respect to the financial aspects of an acquisition?
Mike Maddox
Well, we’re going to look at — obviously, is it an opportunity that’s accretive to earnings and create franchise value for us. And we want to make sure that any dilution that would occur would be returned to within a reasonable period of time, and that 2.5 to three-year range. And so — and then obviously, we want to make sure that anything we do isn’t going to negatively impact credit quality and some of the ways we do business. So, it’s just — it’s got to be something that’s going to be accretive. And we also look at people. And what’s the ability to take that opportunity and expand it and grow it.
Randy Rapp
Matt, I would add one more thing, which I think we’ve talked about a little bit before, which is we have something in a range of $100 million or $125 million of capital that we could think about deploying from a regulatory perspective. And so that would be some sizing range for us as well.
Matt Olney
Got it. Okay. Thanks for that. And then, one more follow-up here. Ben, you mentioned a higher level of CDs that mature in 2Q. I’m just curious kind of what the strategy now is for time deposits. Are you trying to get customers to extend duration, any success, just more broadly kind of what the strategy there is at this point?
Ben Clouse
Well, our primary strategy is continuing to be relationship focused with our clients, which has been our model all along and we’re not going to lose a client over yield. And we’re making sure that we’re accommodative of that and responsive across all of our markets we have.
For example, in second quarter, we’ll have about $70 million of CDs roll-off and another $40 million to $45 million of borrowings and wholesale roll-off. The CDs — repricing ultimately or retention, we might not see a huge change in cost of funds. The borrowings in the wholesale will be pretty significant. And again, we’re really focused on relationship basis and making sure we’re strategic about the rates that we pay.
Matt Olney
And Ben, just a follow-up there. If the loan growth expectations are 8% to 10% this year, should we think about the core deposit growth this year being below that? Or do you think it would match a similar range this year?
Ben Clouse
Going forward, for the rest of the year, I think our expectation is a similar range. We deployed a fair amount of liquidity in Q1. But going forward, we’ll be focused on growing deposits and looking at the whole relationship, as you heard Mike say and expect deposits to move in a range pretty close to loans. And our teams continue to be focused on cross selling and making sure that we’re providing a full suite of services to clients, to generate fee income growth as well.
Matt Olney
Okay. Thanks and congrats on the quarter.
Ben Clouse
Thanks Matt.
Mike Maddox
You’re welcome. Thank you
Heather Worley
Thanks Matt.
Operator
Thank you. I’m not showing any further questions in the queue. This concludes our question-and-answer session. I would now like to turn the conference back over to President and CEO, Mike Maddox, for closing remarks.
Mike Maddox
Well, I — just again, I want to thank everybody for joining our call. We’re really, really proud of the quarter and we’re very, very excited about the opportunity we have to continue to grow and expand and drive shareholder value. And so, we really appreciate all of your support, and look forward to talking to you next quarter, if not before. So, have a great day.
Operator
Thank you. Please direct any follow-up calls to heather@crossfirst.com. That’s heather@crossfirst.com. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Everyone have a wonderful day.
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