Start Time: 11:00 January 1, 0000 11:48 AM ET
CrossFirst Bankshares, Inc. (NASDAQ:CFB)
Q4 2022 Earnings Conference Call
January 24, 2023, 11:00 AM ET
Company Participants
Mike Maddox – President and CEO
Ben Clouse – CFO
Randy Rapp – President
Heather Worley – Director, IR
Conference Call Participants
Brady Gailey – KBW
Andrew Liesch – Piper Sandler
Matt Olney – Stephens
Michael Rose – Raymond James
Operator
Good morning and welcome to the CrossFirst Bankshares’ Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.
I would like to turn the conference over to Heather Worley. Please go ahead.
Heather Worley
Good morning, and welcome to CrossFirst Bankshares 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 in 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 CrossFirst Bankshares; Randy Rapp, President of CrossFirst Bank; and Ben Clouse, CFO of CrossFirst Bankshares. 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 4 of the presentation. Mike?
Mike Maddox
Thank you, Heather. Good morning, everyone, and thank you for joining us to discuss CrossFirst 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 was 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 improvements 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 3.32% for 2019 to 3.50% for full year 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 was 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 taking 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 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 billion plus 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 a 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 CrossFirst Bank, Randy Rapp.
Randy Rapp
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 Kiser to serve as President of our Fort Worth expansion, the hiring of Mike Dombroski [ph] 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 on 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 C&I 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 $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 or 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 C&I 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 C&I 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 8 basis points.
As you will recall, we converted to CECL on January 1, 2022 and have completed our first year using this reserve methodology. At 12/31/22, we reported on allowance for credit loss to total loan ratio of 1.15% and combined allowance for credit loss and reserve for unfunded 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’re 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 Clouse, to cover financial results in more details. Ben?
Ben Clouse
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 GAAP net income of $11.9 million or $0.24 per diluted share, which included several costs related to the acquisition that we closed on November 22. For the year, we earned 61.6 million on a GAAP 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 years’ 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 3.55% to 3.65% 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 million 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.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions]. And our first question will come from Brady Gailey of KBW. Please go ahead.
Brady Gailey
Hi, thanks. Good morning, guys.
Mike Maddox
Good morning, Brady.
Randy Rapp
Good morning.
Brady Gailey
I wanted to start out — 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?
Ben Clouse
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.
Brady Gailey
Okay. And then any sort of forecast for accretable yield in 2023 or do you think that will still be minimal?
Ben Clouse
I think pretty minimal.
Brady Gailey
Okay. 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?
Mike Maddox
Yes, Brady, 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 we made a lot of investments in ’22 that we’re still scaling, in Fort Worth and in Phoenix and in a couple of verticals. The other thing is, 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.
Brady Gailey
All right. And then —
Ben Clouse
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.
Brady Gailey
Yes. Okay. And then finally for me, you guys repurchased almost 5% of the company last year. You’ve used up some of your excess capital in the buybacks and Central used up some of it. How should we — I think the stock is still notably cheap here. So should buybacks continue in 2023?
Mike Maddox
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 it with values we don’t believe fairly represent the value. So, yes, we will continue to be active in the buyback area.
Brady Gailey
Okay, great. Thanks, guys.
Operator
The next question comes from Andrew Liesch of Piper Sandler. Please go ahead.
Andrew Liesch
Hi. Good morning, everybody.
Mike Maddox
Hi, Andrew.
Andrew Liesch
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 in non-interest bearing but also in CDs. I’m curious where are those CDs coming on and what’s the term on those [indiscernible] assets and liabilities here?
Ben Clouse
Sure. Good morning, Andrew. It’s Ben. 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 on rates potentially coming down at some point, although — 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.
Andrew Liesch
Got you. And then what’s that rate right now?
Ben Clouse
On money market? Is that your question?
Andrew Liesch
Yes. Money market and then again like where new loan yields come out to?
Ben Clouse
Okay, yes. New loans I have here in front of me, give me a second to find it. Rates have come up a lot. We’re well into the 6s at this point for new loans, upper 6s. Our loan base, the entire base in the upper 5s, which of course we have in the presentation.
Andrew Liesch
Got you. 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 when do you think the full cost saves will be in the run rate?
Ben Clouse
Yes, 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. For the year, as I mentioned in my comments, 37 million 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.
Andrew Liesch
Got it. That’s really helpful. I’ll step back. Thanks.
Mike Maddox
Thanks, Andrew.
Ben Clouse
Sure.
Operator
The next question comes from Matt Olney of Stephens. Please go ahead.
Matt Olney
Thanks. Good morning.
Mike Maddox
Good morning, Matt.
Matt Olney
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 geography do you think will be the main drivers of that growth this year?
Mike Maddox
Well, we’ve continued to see really strong growth out of Kansas City, Phoenix, Texas. And I think energy has an 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.
Randy Rapp
Yes. Hi, 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 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. 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.
Matt Olney
Okay, sounds good. Appreciate that color. And then going back to the margin, I think you gave us the guidance range for 1Q, the 3.55%-3.65%. I guess the question is, if deposit competition remains intense, I’m curious if you expect weakness below that beyond the first quarter?
Ben Clouse
Matt, absolutely. That’s a big factor. The range I gave you, 3.55% to 3.65% 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, balance sheet being equal 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.
Mike Maddox
Matt, I’m really proud of the way the team maintained our mix in 2022. We lived through a rapidly rising rate environment in ’22. And we actually with the acquisition ended up growing DDA as a percentage of our deposits. And we’re able to keep our deposit beta within I think a fairly reasonable range. So 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.
Matt Olney
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 a buyback, with the growth, organic and inorganic. I guess I’m thinking about the capital of 2023 if 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 it if there could be a need for external capital.
Ben Clouse
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.
Mike Maddox
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.
Matt Olney
Okay. Thanks, guys.
Operator
The next question comes from Michael Rose of Raymond James. Please go ahead.
Michael Rose
Hi. Good morning, guys. Hopefully, don’t call me Matt, Ben.
Ben Clouse
I had already written down your name in anticipation of you being next.
Michael Rose
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. 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 there’s some verticals out there that maybe could cause some concern, whether it be 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 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.
Randy Rapp
Yes. Hi, 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 non-performings at 20 basis points, our classified to capital at 10 and our reserve level of 131, we think the portfolio is really well positioned for future growth and also for some economic uncertainty. We spent quite a bit of time stress testing the portfolio, not only the real estate, but also the C&I portfolio, as 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. So overall, again, just feel good about the quality of the portfolio, although we’re closely monitoring it.
Mike Maddox
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. We went through an energy crisis, and that was something they looked at. And our energy portfolio, although we had a lot of great 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 the 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 was 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 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 validated what we’re doing and very complementary of the team and the job they’re doing. So 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.
Michael Rose
I appreciate it. Maybe just one follow up, separate topic, just on fee income. 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 revenue mix would be? Thanks.
Ben Clouse
Sure, Michael. As a reminder, 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. 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 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 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’ll be significant opportunity for fee income increases for us over our base.
Michael Rose
Perfect. Thanks for taking all my questions.
Ben Clouse
Sure. Thank you, Michael.
Mike Maddox
You’re welcome.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mike Maddox for any closing remarks.
Mike Maddox
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.
Operator
The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.
Be the first to comment