Q4 2022 CrossFirst Bankshares Inc Earnings Call
Okay.
Good morning, and welcome to the cross first Bancshares fourth quarter and full year 2022 earnings conference call.
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I would now like to turn the conference over to Heather Worley. Please go ahead.
Good morning, and welcome to cross first Bancshares 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 are forward looking statements are as of the date of this call and we do not assume any obligation to.
Date 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 also 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 for Mike Maddox, President and CEO of Crawford Bancshares, Randy Rapp President of Cross first bank and Ben Clouse CFO of cross first bancshares at the conclusion of our prepared remarks, our operator, Andrea will facilitate our 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.
Thank you Heather good morning, everyone and thank you for joining us to discuss cross first 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 and adjusted net income for the quarter and $68 6 million and adjusted net income for the year.
This equates to an adjusted earnings per share of $1 37 for the year.
Cross first had an incredible quarter with the closing of our acquisition of central launching our new digital banking platform, a 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 ryzen 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 is substantially improved with N P. As declining from point, 97% in 2019% to 0.2% as of the end of 'twenty to 'twenty two.
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 is contributed to more than 100% improvement in earnings per share and taken our Aro <unk> from 5.38% to 11 point, 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 S. P. A 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 dollar 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 optimistic for our future.
Turning to the most recent quarter, we've 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 the 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 cross first.
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.
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 'twenty to 'twenty three 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 that we important for us to invest in the wellbeing of our people.
Changing 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 we're optimizing our operations and efficiency becomes so important as it does in deepening our community relationships I'm excited about 'twenty, two 'twenty three 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.
Thanks, Mike and good morning, everyone. During Q4, we continued making enhancements to our leadership team with the promotion of Matt Mayor 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 Dombrowski to lead our energy team and strategy.
The addition of Scott page and his leadership team in Colorado, and New Mexico with the Central Bank acquisition.
As we execute on our growth strategy. We added 27 net new producers in the quarter with 25 being from the central acquisition, including S. P a 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 were 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 are.
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's important to note that the majority of our growth in 2022 was with existing clients and sponsors where borrowers with significant history with bankers and leaders we have hired during.
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 and 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 exist 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.
Over the past year average total deposits have increased 746 million or 16%, including $570 million from the central acquisition.
Average noninterest bearing deposits increased slightly during the quarter to $1 1 billion and represent 25% of total deposits up from 22% at the same 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 nonperforming assets of 5 million to $13 2 million.
Resulting in a nonperforming assets to total asset ratio of 0.2% did.
The decrease was due primarily to paydowns in the energy portfolio.
This ratio is down from 0.31% in Q3 and 0.58% at the at year end 2021.
Classified assets to capital plus combined reserves into 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 300000, and net charge offs of $3 8 million for the year, resulting in a charge off rate of eight basis points.
As you'll recall, we converted to Cecil on January 1st 2022, and have completed our first year using this reserve methodology at.
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 for uncommitted <unk> 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 to consumer exposure and we were 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'll now turn the call over to our CFO , Ben Clouse to cover financial results in more detail Ben.
Thanks, Randy and good morning, everyone.
As Mike indicated adjusted net income expanded this quarter to $17 $9 million or <unk> 36 cents per diluted share with GAAP 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 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 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 noninterest bearing.
The transaction resulted in $13 million of goodwill and $16 5 million in core deposit intangibles that will be amortized through noninterest expense over 10 years using some of the years digits.
As part of the purchase accounting adjustments, we recorded a discount on non P. C. D loans of $6 7 million, which will be accretive which will be accreted into interest income over the expected life of those loans.
We maintained some of the existing F. H L. B borrowings added from the deal and liquidated the investment portfolio.
Turning to the P&L the day, one provision impact, including P. C. D accounting was an additional $4 4 million a provision expense.
Our noninterest 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 point O 3%.
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 alone returning to accrual status, which is masking an additional million dollars 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 F. O M. C 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.
The competition for deposits will continue into 'twenty three 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 noninterest 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.
Card income was steady this quarter and we remain focused on increasing credit card transaction volume.
Adjusted noninterest 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 there.
Remainder of the increase was driven by higher incentives some modest head count growth and increased loan related costs.
We anticipate noninterest 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 continued 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 fifties through 2020 three as we finished 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 nondeductible 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 2020 three.
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 358000 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 our 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.
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Yeah.
And our first question will come from Brady Gailey of <unk>.
Please go ahead.
Hey, Thanks, good morning, guys.
Good morning.
But I wanted to start out I know central close kind of intra quarter, but what 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.
Hey, good morning, Brady, it's been a the answer in short is no there wasn't any significant impact for a for the year. They do have a little bit better NIM than we have historically, but not enough to move the needle certainly and I'm in a month.
Okay, and then any sort of forecast for accretable yield in.
In 2023, or do you think that'll still be minimal.
I think pretty minimal.
Okay Alright.
Alright, and then another great wound growth quarter, even excluding the acquisition I think loan growth was in the mid 20% range annualized so very very strong, but how are you guys thinking about loan growth as we look to 2020 three.
Yeah Brady.
You know, it's it's obviously, where we're trying to figure out what's going to happen with the economy, but 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 'twenty, two but you know we expect loan growth to be a high single digits to low double digit loan growth. This year, we're still pretty bullish.
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 'twenty. Two that there were still scaling you know in Fort worth and Phoenix, and then a couple of verticals. So.
The other thing is you know in 'twenty 'twenty. Two we grew those numbers are even though we shrank our energy portfolio by over 100 million. So we overcame that and had to grow.
We don't anticipate that to be the case in 2023, and we're pretty excited about the energy space and the opportunity to to to have some moderate growth there.
Alright and radios.
So Brady it's been 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 and coincidentally, it's 26% organic without the acquisition.
Yeah, Okay, and then and then finally for me.
<unk> repurchased almost 5% of the company last year.
But you know you you've used up some of your excess capital in the buybacks and central you used up all of it or how should we I mean, the stock is still notably.
She peers.
Buybacks continue in 2020 three.
The stock is ridiculously undervalued in our opinion and you you should expect that will continue to be a active are buying our stock back. If it continues to trade with values. We we don't believe fairly you know represent the value. So yeah, what we will continue to.
Two to be active in the buyback area.
Okay, great. Thanks, guys.
The next question comes from Andrew <unk>.
Yeah.
Please go ahead.
Hey, good morning, everybody Hey.
Hey, Andrew.
Right.
Question here on margin and yield I'm, just curious what where the blended yield on what was added in the quarter.
It looks like you had some good growth in noninterest bearing but also in Cds I'm curious where is the why are those C d's coming on and what's the term on those trying to Max out at.
Assets and liabilities.
Sure Good morning, Andrew It's Ben.
No we're not a big C. D 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.
Potentially coming down at some point, although but we think that's likely after the next 18 months and in regard to your.
Your question, we're probably most competitive in money market for our client base and that's really.
Where we compete the most on price a day to day.
And where we raised the most funds.
Gotcha, and then what what it.
It doesn't mean, what what that rate right now.
[noise] on money market is that your question Yeah, Yeah money market, and then again like where new loans new loans.
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 to 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 in the presentation.
Mhm Gotcha.
And then just a question on the timing from the cost saves on the deal.
It looks like expenses might be a little bit elevated here in the first quarter and then come down after that and so I'm just curious on when do you think the full cost saves will be in the library.
Yeah, I think by second quarter, we anticipate those will be in the run rate or 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 will have reached the the full cost saves for expense outlook, you know for the year as I mentioned in my comments 37 to 38 million noninterest 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.
That's really helpful I'll step back thanks.
Thanks, Andrew.
The next question comes from Matt Olney of Stephens. Please go ahead.
Thanks, Good morning, one Apple back on.
On the loan growth.
Michael I think you said high single low double digits.
You're in a handful of newer verticals into newer markets.
Loan categories or geographies do you think will be the main drivers of that growth this year.
Well, we've we've continued to see really strong growth out of Kansas City, Phoenix and taxes.
And I think energy has a has the opportunity to do you have some reasonable growth, but but you know, we really seen steady growth out of all of our markets and and so.
We're just doing some dynamic markets that are providing some opportunity Randy you might want to talk about.
Segments Yeah.
And mats, Randy I know as Mike said, we are seeing good growth across the platform and you referenced earlier, we've made investments in markets. You know just to be referenced for Frisco Fort worth that are just really starting to get going in and you look at in Arizona, and they've they've had outsized growth and being very successful in that market.
And you know we we are excited to be in the Denver, and Colorado Springs markets and think those also provide growth or our sponsor finance group has reported good growth and has a very robust pipeline. He talked about energy, we're seeing really nice opportunities and in the energy space with some of the best structure and pricing that we've we've seen and read.
Period, and we continue to grow our real estate portfolio, but being very selective in that space and but again and in our higher growth markets are still presenting some very nice real estate opportunities.
Okay sounds good I appreciate that color and then going back to the margin.
I think you gave us the guidance range for <unk> 355 365.
I guess the question is if you had deposit competition remains intense I was curious if you expect.
Weakness.
Beyond the first quarter.
Well, Matt absolutely that's a that's a big factor the range I gave you $3 55 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 cut.
Oh of rate increases, we do expect a couple of basis points of potential margin expansion, you know balance sheet being equal and as you. As you noted the headwind to that is can we maintain our our deposit mix as you know Randy and I mentioned in our comments.
We're very much focused on that.
And we will have our people focused on that through through incentives for this year you.
No matter I'm really proud of the the the.
The way the team maintained our mix in 'twenty 'twenty. Two you know we lived through a rapidly rising rate environment in 'twenty, two and we actually you know with the acquisition ended up growing our DDA as a percentage of our deposits and.
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 'twenty, three and and are really really focused on our DDA growth as I know everybody is and we're.
We're doing some things from an incentive standpoint, and a strategy standpoint to continue to really grow D. D. A.
Okay. Thanks for the commentary.
Lastly on capital I think coming into last year.
Suppose to deploy a chunk of the excess capital and it looks like you've accomplished that with a buyback with the growth.
Organic and inorganic.
I guess I'm thinking about the capital in 2023.
The loan growth high single to low double digit loan growth.
Capital ratios from here I'm, just trying to appreciate if there could be a.
Need for external capital.
Yeah, we do Michael I expect to accrete them from here through through earnings.
Sorry, Matt.
We do expect it to accrete through earnings and as as we've modeled out the year. We believe our earnings growth will outpace our our our balance sheet growth as we built our model.
You know, Matt you know, we 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.
Okay. Thanks, Scott.
Yeah.
Question.
Raymond James.
Go ahead.
Hey, good morning, guys.
I got a call me, Matt then hopefully don't call me Matt.
[laughter] I had I had already written down your name.
Yeah.
Being that [laughter] 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.
He's been on credit.
The reserve is sitting here.
115 of loans non.
Non performers are really work their way down I assume criticized and classifieds I'm trying to.
In the right direction as well, but I I think what I hear from some investors.
There's some some verticals out there that maybe.
Could could cause some concern whether it would be you know real estate I think is what we hear most often in and then I think what I hear about you guys as you 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 may be kind of doubt the performance and how can you help us get more comfortable with just credit in general thanks.
Yeah, Hey, Michael It's Randy I'm. 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 you know one thing you said there is a portion of our portfolio that has been through.
Through Covid and some unique economic times and performed well.
You know I think of lodging and and how our sponsors stepped in and and and supported projects through that and you know 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 it at those those portfolios closely at the reserve level you know in our in our conversion to Cecil We did complete our first year and like the other institutions. We've been you know, making sure we learn how Cecil.
Acts in different environments, but when we closed the year you know 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 and Cecil was in the in the reserve for unfunded commitments area.
And you know we don't think that will continue to increase at that same pace and so again, we look at our nonperforming at 20 basis points, our classified to capital at 10, and a reserve level of 131, we think the portfolio is really well positioned.
For future growth and also you know 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 portfolio as we continue to run those tests and other portfolio holds up well even with additional rate increases.
So you know where we're adhering to our underwriting standards and think were being very conservative in our underwriting. So overall again just feel good about the quality of the portfolio, although we're closely monitoring it.
Yeah, Michael I'd, just add you know Randy and the team have done a great job on the credit side we've.
We've been telling investors and analysts that we feel good about our credit quality for for three years now and its proving out that our credit quality as is performing and our portfolio's performing yeah. We went through an energy crisis and that was something they looked at and in our energy portfolio, Although we had a.
Great migration, we had very little loss and in that portfolio has come back and is performing very well.
<unk> 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 Theres 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 selling it.
Hospitality space, there was strong sponsors where professional operators are and and those port 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 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 been very complimentary of the team and the job they're doing so.
You know to your question, Michael what 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 to keep that quality and keep improving it.
I appreciate it maybe just one follow up a separate topic just on fee income.
You know it looks like ATM and credit interchange and Tom has come down a little bit any any explanation for that and then looking forward. It looks like central will add a little bit too.
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 kind of longer term yeah.
Revenue mix would be thanks.
Sure Michael as a reminder, you know one headwind we've had on fee income particular to credit card is one large client with with a very significant concentration who had a very big spike in their business related to COVID-19 and they have seen.
<unk>.
Come down all year, we're finally at the point, where we're there and you're 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.
I'll end up 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.
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 'twenty 'twenty. Three is some fee income from their SBA business and to a lesser extent mortgage which of course is.
<unk> is pretty low volume right now they used a model where they sold all of 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 the gain on on SBA sales is a little bit depressed in 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 are on many of those in particular in the in the guaranteed portfolio and will simply make Ah Ah Ah Ah Ah cost.
[noise] decision.
You know as we think about what the game looks like in the future, which we expect will come back from from its current depressed.
Depressed levels, but.
When that changes there'll be significant opportunity for fee income a gain increases for us over our our base.
Perfect. Thanks for taking all my questions.
Sure. Thanks, Mike Okay.
This concludes our question and answer session I would like to turn the conference back.
Mike <unk> for any closing remarks.
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.
I'm very proud of our 26% growth in 'twenty two 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 where we're so well positioned for 2023 and the opportunities that will provide and we've got a great team in place.
I'm very excited to see what the future holds thank you all for joining us.
Yeah.
The conference has now concluded thank you for attending today's presentation.
I'll disconnect.
[noise] [music].