QCR Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 8 speakers on the call.

Operator

Greetings, and welcome to the QCR Holdings, Inc. Earnings Conference Call for the Q3 of 2023. Yesterday, after market close, the company distributed its 3rd quarter earnings press release. If there is anyone on the call who has not received a copy, You may access it on the company's website, www.qcrh.com. With us today from management are Larry Helling, CEO and Todd Gipple, President and CFO.

Operator

Management will provide a summary of the financial results and then we'll open up the call to questions from analysts. Before we begin, I would like to remind everyone that some of the information management will be providing falls under the guidelines of forward looking statements as defined by the Securities and Exchange submission. As part of these guidelines, any statements made during this call concerning the company's hopes, beliefs, expectations and predictions of the future Our forward looking statements and actual results could differ materially from those projected. Additional information on these factors is included in the company's filings, which are available on the company's website. Additionally, management may refer to non GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.

Operator

The press release available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non GAAP measures. As a reminder, this conference is being recorded and will be available for replay through November 2, 2023, starting this afternoon approximately 1 hour after the completion of this call. It will also be accessible on the company's website. I will now turn the call over to Mr. Larry Hellion at QCR Holdings.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Welcome everyone and thank you for taking the time to join us today. I will start the call by providing some highlights for the quarter. We will also include a review of our specialty finance business with an update on our loan securitization strategy. Todd will provide additional details on our financial results for the quarter.

Speaker 1

We delivered solid 3rd quarter results, highlighted by a static net interest margin, robust loan growth and significant fee income. In addition, our deposit base is stable, Our capital ratios are strong and our asset quality remains sound. Our Q3 and year to date results Demonstrate the continued strength of our franchise, our commitment to relationship banking and the successful execution of our strategic initiatives. Our net interest income grew 3.9% from the 2nd quarter. The increase was driven by a static net interest margin Strong loan growth.

Speaker 1

In the Q3, we delivered reported net income of $25,100,000 or 1 point $0.49 per diluted share. Our adjusted net income for the quarter was $25,400,000 And our adjusted EPS was $1.51 per diluted share. We generated an adjusted ROAA of 1.23 percent and an adjusted ROAE of 12.12% for the quarter. And we target performance near the high end of our peer group. Loan growth was strong during the quarter, growing 14.2% on an annualized basis.

Speaker 1

Our loan growth was driven by solid activity from our traditional lending business and even stronger contributions from our low income housing and tax During the Q3, our core deposits, excluding short term broker deposits, were relatively stable. Core deposits declined slightly by $9,000,000 after growing $339,000,000 or 23% on an annualized basis during the Q2. Our experienced team of bankers continues to add new relationships to our strong and diversified deposits franchise. Our uninsured and uncollateralized deposits remain low at 20.1% of total deposits at quarter end. Our substantial on balance sheet liquidity combined with available liquidity at the Federal Home Loan Bank, Fed and other upstream and brokerage sources more than cover our uninsured and uncollateralized deposits.

Speaker 1

Our asset quality remains strong as Our ratio of non performing assets to total assets was 41 basis points at quarter end. Our reserve for credit losses represents 1 point 9% of total loans and leases held for investment and continues to be near the upper quartile of our peer group. Our reserve levels reflect our conservative approach and provide a buffer against potential economic challenges. While we are cautious given elevated interest rates and economic uncertainty, we remain optimistic about the resilience of our Midwest markets. Unemployment remains below the national average across our footprint and business activity has continued at a steady pace.

Speaker 1

As we mentioned last quarter, our exposure to commercial office billings is very low at just 3% of total loans With an average loan size of $859,000 These properties are predominantly located in suburban locations Within or adjacent to our markets, they are well collateralized and are performing in line with expectations with no significant repayment concerns. We can continue to maintain strong levels of capital that have supported another robust year of growth. We are focused on further building our capital levels. With a modest dividend, strong earnings and our pending securitization, We continue to target capital ratios in the top quartile of our peer group. During the quarter, we grew loans 14.2% on an annualized As we have stated in prior quarters, our specialty finance team offers low income housing tax credit lending to a select group of developers and investors with whom we have built long standing relationships.

Speaker 1

Our clients continue to experience Strong demand for their projects as the need for affordable multifamily housing far exceeds supply. The industry has an excellent track record with negligible historical default rates. Based on decades of stability in the industry In our own experience, these high quality loans are ideal for securitization. As we have previously discussed, Our intent is to securitize a portion of our existing LITEC loan portfolio with plans to continue this on an ongoing basis. We view this as an effective tool in managing our liquidity and capital.

Speaker 1

It will also provide ongoing capacity I am pleased to announce that we have 2 LITEC loan securitizations scheduled to close in the 4th quarter, A tax exempt pool of $130,000,000 and a taxable pool totaling $135,000,000 Both are now scheduled for closing prior to the end of November. The financial outcome of these first securitizations We'll be approximately breakeven subject to final valuation and transaction costs. We believe that our LiTAC lending business is extremely valuable and that it deserves a higher valuation multiple than traditional banking. While our 3rd quarter loan growth was exceptional, We are maintaining our guidance for growth in loans held for investment for the Q4 to be in a range of 9% to 12% on an annualized basis As our pipeline continues to be strong, while economic headwinds remain a risk, we have demonstrated excellent historical credit quality, Robust fee income sources, a valuable core deposit franchise and a strong capital position. In addition, We believe that we have the ability to defend our net interest margin in a higher for longer interest rate environment.

Speaker 1

These qualities, when combined with our current valuation, have positioned our company and shareholders to benefit as we continue to execute on our strategic initiatives. I will now turn the call over to Todd to provide further detail regarding our Q2 results.

Speaker 2

Thank you, Larry. Good morning, everyone. Thanks for joining us today. I'll start my comments with details on our balance sheet performance during the quarter. As Larry mentioned, we grew total loans 14.2% on an annualized basis during the quarter or $227,000,000 of net growth.

Speaker 2

In anticipation of our loan securitizations, as of the end of the quarter, we have classified $278,000,000 of LITEC loans as held for sale. Our loan securitizations in the 4th quarter will improve our liquidity and enhance our TCE ratio. In addition, our long term securitization strategy will enable us to continue to fund the growth of our LiTec lending business and the corresponding capital markets revenue that we received from this business, while maintaining the portfolio within our established concentration levels. Core deposits were relatively stable for the quarter. We have grown core deposits nearly 8% on an annualized basis during 2023, which has allowed us to fund our strong loan growth.

Speaker 2

We also successfully rolled off $103,000,000 of broker deposits in the 3rd quarter. As Larry mentioned, our total uninsured and uncollateralized deposits were at a very low level at quarter end at 20.1 percent of total deposits. In addition, the company maintained approximately $3,000,000,000 of available liquidity sources at quarter end, which includes $1,100,000,000 of immediately Now turning to our income statement. We delivered net income of $25,100,000 or $1.49 in diluted earnings per share for the quarter, driven by higher net interest income and strong non interest income along with well controlled expenses. Our adjusted net income was $25,400,000 or $1.51 per diluted share.

Speaker 2

Net interest income was $55,300,000 an increase of 3.9% from the prior quarter. Adjusted NIM on a tax equivalent yield basis remained static on a linked quarter basis at 3.28 percent, While we experienced a more modest increase on our cost of funds, with a slowing in the shift of the composition of our deposits From non interest and lower beta deposits to higher beta deposits. We are pleased to see this stabilization in our deposit mix and believe that it will continue to benefit our net interest margin going forward. As we look to the 4th quarter, We are anticipating a pause from the Fed and a yield curve that continues to be partially inverted. We expect our loan and deposit betas will continue to increase, but more slowly and at offsetting levels.

Speaker 2

Our loan securitizations in the 4th quarter will also help lessen the pressure on higher funding cost and further stabilize our deposit mix. As a result, we are guiding to a relatively static adjusted NIM TEY in the 4th quarter within a range of 5 basis points of expansion on the high end and 5 basis points of compression on the low end. Turning to our non interest income, which was $26,600,000 in the 3rd quarter. Our capital markets revenue was $15,600,000 this quarter And while down from the outsized performance of $22,500,000 in the prior quarter, the $15,600,000 of production outperformed our annualized guidance range. Capital markets revenue from swaps continues to benefit from the strong demand for affordable housing and stabilization in the supply chain and construction costs.

Speaker 2

In addition, developers have been successful in restructuring their project capital stacks in the current interest rate environment. Capital markets revenue from swap fees has been a consistent and strong source of fee income. Based on decades of stability in the LiTec industry and our own experience, we believe that this business will perform well throughout various economic cycles. Our LiTec lending and capital markets revenue pipeline remains healthy as our clients continue to experience strong demand for new As a result, we are maintaining our capital markets revenue guidance for the next 12 months in a range of $45,000,000 to $55,000,000 In addition, we generated $3,800,000 of wealth management revenue in the 3rd quarter, consistent with the 2nd quarter. On a year to date basis, Wealth Management revenue was up $488,000 or nearly 6% on an annualized basis.

Speaker 2

Our wealth management team continues to benefit from new relationships, adding 220 new clients and 577,000,000 and assets under management in the 1st 9 months of this year. Our continued growth in new relationships helped offset market volatility during the Q3. We are also pleased to announce the start of our new wealth management business in the Southwest Missouri market at our Guaranty Bank Charter. We have a highly experienced team in place that will expand the reach of our current wealth management business. Now turning to our expenses.

Speaker 2

Non interest expense for the Q3 totaled $51,100,000 compared to $49,700,000 for the 2nd quarter and at the high end of our guidance range of $48,000,000 to $51,000,000 The increase from the prior quarter was primarily due to higher variable employee compensation For year to date performance, increased professional and data processing fees and other expenses related to fixed asset disposals. These increases were partially offset by lower advertising and marketing expenses. We remain diligent in controlling our expense growth. For the Q4, we are reaffirming our non interest expense guidance again this quarter to be in a range of $48,000,000 to $51,000,000 Our asset quality remains strong. During the quarter, NPAs increased by $8,600,000 to $34,700,000 or 41 basis points of total assets.

Speaker 2

The majority of the increase was driven primarily by 3 client relationships from unrelated industries. Approximately 1 third of our NPAs consist of one relationship and we believe that this credit will be resolved without a loss. Our 20 year historical NPA percentage has averaged approximately 90 basis points on total assets. We remain significantly below those levels today and believe that we are well positioned given our historical experience and the uncertain economic environment that continues to exist. Classified and criticized loans as a percentage of loans and leases Also remain quite low at 1.05% and 2.98% respectively.

Speaker 2

Our 20 year historical average of classified and criticized loan percentages are approximately 2.7% and 4.6%. Similar to our NPAs, we remain well below historical averages in these categories and they have remained relatively stable over the course of 20 $3,300,000 of provision for loans and leases, primarily driven by the loan growth during the quarter. We expect to continue to maintain Our reserves to loans held for investment was fairly static at 1.39% It continues to be at the higher end of our peer group. We continue to maintain solid levels of capital that have supported another Our total risk based capital ratio declined by 29 basis points to 14.4% Due to the very strong loan growth during the quarter, our tangible common equity to tangible assets ratio declined 23 basis points to 8 0.05 percent. The decline in the TCE ratio was due to the rise in interest rates during the quarter and the resulting negative impact on AOCI related to our securities and derivative portfolios.

Speaker 2

With continued strong earnings Coupled with our modest dividend, our tangible book value per share increased by $0.34 during the Q3. The decline in AOCI partially offset the growth in our tangible book value. Our capital allocation priorities remain Finally, our effective tax rate for the quarter was 6.8% compared to 12.2% in the 2nd quarter. We benefited this quarter from a full quarter of strong growth in our tax exempt loan and bond portfolios that was added during the late portion of the second quarter and throughout the Q3. As a result, this has helped drive our effective tax rate even lower and remains one of the lowest in our peer group.

Speaker 2

We expect the effective tax rate to be in a range of 8% to 11% for the 4th quarter. With that added context on our Q3 financial results, let's open the call for your questions. Operator, we are ready for our first question.

Operator

Thank you. Today's first question comes from Damon DelMonte with KBW. Please go ahead.

Speaker 3

Hey, good morning guys. Hope everybody is doing well today. Good morning, Larry. Just wanted to start off on the margin commentary. Todd, I think you had said in your remarks that you're Anticipating the margin could be plus or minus 5 basis points here in the Q4.

Speaker 3

Just kind of wondering under like which scenarios Are you expecting that to change? Like, is there something on the deposit mix side, which could have a bigger impact on which direction that the margin goes?

Speaker 2

Sure, Damon. Thanks for the question. So our base assumptions on static would be no Fed hikes in November or December. The Loan growth of that 9% to 12% that we've guided to, having the loans sold of 265% roll off In November, as we've guided to, securitization will give us a couple of basis points of lift in the 4th quarter. But the big assumption around deposit mix is that it's going to remain fairly static.

Speaker 2

We did see a real Positive slowdown in terms of mix shift in the Q3, and candidly, that's continued here in October. Our non interest bearing is Actually, up $20,000,000 thus far in the quarter. So with all of that, we're feeling very optimistic about static margin. The reason for the goalpost on both sides of that up and down would be just how effectively we're going to continue to get some Loan yield pop. We are starting to see some really nice loan yields on new loans.

Speaker 2

And To the extent we can continue that and also hold on to a more static mix of deposits, then we're a little more optimistic I hope that gives you enough color around what our assumptions are.

Speaker 3

Yes. No, that was helpful. Thank you. And do you happen to have like what and I'm sorry if I missed this, but what new production so new loans coming on the books Generally, you're coming out. What kind of yields?

Speaker 2

Sure. Yes. Thanks for that question, too, Damon. So in the 3rd quarter, Our average new fundings were $7.47 but that's actually also accelerated intra quarter And in September alone, those were up to 7.56. Floating rate loans, which most of Well, actually, all of our LiTec production would be in that category.

Speaker 2

That was 8.10 yield for the 3rd quarter, And that also was ramping up during the quarter, had a terminal rate of 8.19% in September. So we are starting to see some real nice lift in new loan production. And as I said, in terms of the NIM guidance, that's a big part of us being able to Hold on to NIM.

Speaker 3

Got it. That's great. That's helpful. Thank you. And then I guess With regard to the credit in those three relationships that kind of came onto the books this quarter, was one of those part of So 1 third of the overall NPAs or no?

Speaker 1

No, Damon. There were Three new ones that came on. The onethree one is the ones we've been working on for a couple of quarters. The 3 new deals That came on totally different industries, 1 in the hospitality space, 1 small homebuilder, 1 was actually a daycare. And if you step back and look at it, we're moving toward what I consider Rolling forward a normalization of credit, which was absent the last couple of years because of all the PPP money and those kind of things.

Speaker 1

So if there were management issues, It got covered up by excess liquidity that borrowers had. That's kind of gone now for most people, especially the really small businesses. So, we don't see any broad based trends, but hey, management decisions are showing up a little bit more than they did 2 years ago.

Speaker 3

Got it. Okay, that's helpful. That's all that I had. I'll step back for now. Thanks a lot.

Speaker 2

Thanks, Damon. Thanks, Damon.

Operator

And our next question comes from Nathan Race, Piper Sandler. Please go ahead.

Speaker 4

Yes, great. Hey guys, good morning.

Speaker 2

Good morning, Nate.

Speaker 4

Hi, Nate. Going back to the margin discussion, and just kind of thinking about some of the dynamics on the right side of the balance sheet that factor into the guidance for 4Q. Just curious to what extent you guys plan to run off some of the brokered CDs that were added in the Q1. And obviously, the overnight borrowings were up Versus the Q2, but I imagine those can come down with the securitizations in the Q4 as well. So just trying to think about how we thinking about the overall size of the right side of the balance sheet and kind of what you guys are seeing in terms of additional core deposit growth opportunities going forward?

Speaker 2

Sure, Nate. Yes, you're spot on with your opening comment on what you were seeing. And that is That $295,000,000 of overnight was really a placeholder for the securitization and the liquidity we're going to free up here In the Q4. So we did that really as a placeholder for funding until we are able to Close those securitizations, so we would see that going away. We actually rolled off $103,000,000 of the brokered In this most recent quarter, and that had a 4.80 average handle.

Speaker 2

So we felt really good about seeing that roll off and replacing it with core deposits. When you look at our core deposits, I mean, they were essentially static quarter to quarter. We liked it that way. That was somewhat intentional. We're trying to take some of the staying out of new deposit generation costs.

Speaker 2

Again, that's Another big lift from the securitization that gives us the ability to be a little bit more patient with deposit growth. But maybe the punch line for you in terms of the right side of the balance sheet, we would expect to fund Any and all new loan growth going forward with core deposits, not with overnight, not with brokered. And so that leaves us With roughly $200,000,000 of brokered that's going to mature during 2024, And we would expect to keep rolling that off and not replace it with anything but core deposits.

Speaker 4

And is The replacement costs on those brokered CDs, is that marginally lower than what you guys have seen in terms of pricing on new core deposits today?

Speaker 2

Well, new core deposits are still very pricey, of course. And so, some of the big chunks come with a 5 handle or a 5 plus handle. But we're really fortunate to have such strong bankers and very good treasury management people and platforms. So we do continue to pick up actual core relationships. And so those blended rates when they come in, When we pick up a new treasury management client, we're going to get some non interest bearing.

Speaker 2

We're going to get some money market that might be in the 2s. And then, of course, we're probably going to have to pay a little bit higher for some of their excess cash. But Blended, all in, we're really looking to try to keep that coming on a blended rate somewhere close to those brokers, Which again would be in the mid to upper 4s. So really just swapping those out from a cost of funds perspective.

Speaker 4

Got it. That's very helpful. And just maybe thinking about expenses for next year, and I know it's a fluid situation At this point in the year in terms of thinking about next year, and then appreciate that you guys have a fairly variable cost structure relative to overall revenue. But just any guidepost in terms of how you guys are thinking about expense growth for next year? I think the historical goal is to limit expense growth to 5 Is that a reasonable expectation assuming you guys had kind of the midpoint of capital markets revenue for the next 12 months?

Speaker 2

Sure. Nate, that would be spot on. Our 5% non interest expense Guidance or strategy in our 965 strategy is what we'd be holding ourselves accountable to next year. We still feel good about our guide for Q4 in the 48 to 51 range. If you're out modeling 'twenty four, that 5% would be a good thing to use Because it does tie in to our 965 strategy, it's certainly what everyone in our company understands Is the guideline.

Speaker 2

And so we're in the middle of budgeting as you would expect right now. And that's certainly the expectation that Larian, I would have for next year's non interest expense, 5% or better.

Speaker 4

Okay, great. And then just going back to credit quality, I think we've been talking about that 1 third proportion of NPAs that you guys expect to resolve without a loss for a couple of quarters now. So Larry, any sense on just the timing of when that resolution is expected to occur?

Speaker 1

Yes. I mean, it's certainly hard to tell when you get into these kind of situations. I talked to a workout guy that handled that yesterday, And it's probably the middle of next year before we get some clarity when you start going through the legal channels. We're going through the legal process. It's still a really good quality asset that is very valuable.

Speaker 1

And so, it's back half of next year, probably before we could We have some smaller ones that between now and then that we would expect to be resolved.

Speaker 4

Okay, great. And just one last housekeeping question. BOLI income was up About $1,000,000 quarter over quarter. Is that more one time in nature? Or did you guys kind of reevaluate a new plant asset in the quarter?

Speaker 4

And is that

Speaker 2

Yes, Nate, that's a good catch. That is a one time event. So Going back to the 2nd quarter number would be a more normalized run rate.

Speaker 4

Okay, great. And then just lastly, any thoughts on the tax rate going forward? I apologize if you described that in your prepared remarks. I missed it.

Speaker 2

No, not a problem at all. We did give some guidance on that. And right now, our is that that's going to be somewhere in 8% to 11% for the 4th quarter, a little bit up from this quarter. That would Be a little more normal in terms of what we would expect for the guidance that we have given all of you.

Speaker 5

Thanks guys.

Speaker 2

Thanks Nate. Thanks Nate.

Operator

And our next question comes from Brian Martin with Janney. Please go ahead.

Speaker 6

Hey, good morning, guys.

Speaker 2

Good morning, Brian.

Speaker 6

Hey, nice quarter. I just a couple of things that weren't asked here, just maybe from a I guess the New Wealth team, Todd, just quickly on the tax rate. The thought for next year, is that 8% to 11% still kind of a Bookend, good range for next year given what we know today?

Speaker 2

Yes. I think, Brian, for now, I'd go with that. We'll likely have some more clarity around that for full year 'twenty four when we talk to all of you in late January for Q4. But for now, that's probably a good place to start.

Speaker 6

Okay. All right. And then just you mentioned just One last one on the margin, Todd. I guess you talked about or maybe Larry talked about it just being maybe feeling a bit more confident to defend the margin in a Higher for longer environment, I mean, anything else you haven't I mean, I guess, as far as just kind of supporting that statement, just as far as you look out a couple of quarters, I guess kind of what gives you a bit more confidence today? Anything over and above you've already talked about?

Speaker 2

Sure. I think the biggest thing, Brian, that gives us A lot of confidence that we're going to be at this more static margin, even into 2024 is, what's happened on the right side of The balance sheet, the deposit base really settling in, settling down, certainly did so in Q3. That's why We had guided static to maybe down 10 basis points and we came in at static. And what really Allowed us to show that nice outcome was the deposit base stabilizing. We've seen that continue here thus far in the Q4 through the month of And that really has been what has impacted our margin the most during this hiking cycle, of course, has been the right side of the balance So it's starting to settle in.

Speaker 2

The mix shift has really stopped, not just slowed, but for the most part stopped. And our beta results have actually been quite good on the deposit side. Our betas have outperformed our modeling. It's just the mix shift that really caught us and caught the industry, of course. So that's the thing that I would really point to, Brian, that gives us Confidence about a more static margin.

Speaker 2

If we're in this rate environment for longer, we feel like We're not going to continue to believe margin. We're going to be able to hang on to it.

Speaker 6

Okay. And is it worth my guess, the spot margin, Todd, in September Where that was

Speaker 2

at? Sure. Yes. So in July, it was 3.20 7. In August, it was 3.29 and in September, it was 3.30.

Speaker 2

And that again bodes well for The go forward because our full year was $3.28 So we saw a nice ramp during Q3, and That gives us some real confidence going forward.

Speaker 6

Got you. Okay, that's helpful. And just last 2 for me. Just on the just housekeeping, the accretion, I know you talked last quarter pretty close to where it was at. Is that kind of a good level to think about here in the next couple of quarters?

Speaker 2

It is. So it was at 500, which is much more normal than prior quarters. And really, our accretion model would show it being close to that $500,000,000 in Q4. And that leaves us with roughly $4,000,000 of accretion left. And if you're looking at $24,000,000 I would say, Again, continue that $500,000 per quarter, so roughly $2,000,000 for 2024.

Speaker 6

Got you. And with the securitization on the LiTec, where is your concentration limit? Kind of where you're targeting that to be now As you kind of utilize it, the securitizations, I mean, where would you like that portfolio to be?

Speaker 1

Yes. How we'd look at that one, Brian, is a little bit as a percent of our capital, We'd probably like to maintain it around the percent of capital that we have today. And so as we grow capital, we'd be comfortable continuing to grow that. You know, more as if you step back and look at the loan growth that we've had over a long period of time, Our total loan growth has been 10% roughly over a long period of time. What we're going to do on balance sheet now Because we're going to do securitizations going forward is to really grow the on balance sheet or the loans held for investment more like 5 We think that's going to provide a great funding mechanism, better pricing power on the deposit for us that will flow through under our NIM eventually.

Speaker 1

And so we're going to grow those, but at a more slow pace than we have over the last couple of years.

Speaker 6

Got you. Okay. That makes sense. Thank you, Larry. And last one was just on the it sounds like you brought a new team on, maybe just can elaborate a little bit on just How that changes the dynamics on the well side?

Speaker 6

I know you guys have been looking at that for a while, so congrats on that. But any commentary on that you could provide?

Speaker 2

Sure, Brian. No, we're very excited about getting it started in Southwest Missouri. Guaranty Bank Has got a great deposit base in this community in Southwest Missouri is a great place for us to Have Wealth Management. So we're very pleased to have that started. We actually have 2 individuals Hired and have hit the ground running and bringing in new clients already.

Speaker 2

We're already integrating them with our bankers here to make sure we're getting all the Right faces in front of them. So we have very high expectations for that to grow nicely and quickly here in Southwest Missouri. The beauty of our model is, we're not having to stand up an entire trust operations. We use the operations at our Quad City Bank Charter, our first charter and where all of our operational folks for trust reside. And so that wealth management group can really just focus on bringing in clients and giving them great service and they don't need to worry about learning the back We don't need to stand up the back office.

Speaker 2

So this is a very, very long sales cycle and a very long process to grow wealth management. So You're not going to see big shifts in our revenue numbers quickly, but the sooner we get started, the sooner we're going to build 100 of 1,000,000 of dollars in AUM in this market. So we're pleased to be started. We'll just tell you we're very active in our Des Moines Metro looking to do the same thing. So we hope to Have an announcement in Des Moines sometime next year that we've gotten Wealth Management off and running in that last market in Des Moines.

Speaker 6

Perfect. Thank you for the color. Congrats on the quarter and the hires and thank you.

Speaker 2

Thanks, Brian. Thanks, Brian. And

Operator

And our next question comes from Daniel Tumayo with Raymond James. Please go ahead.

Speaker 5

Good morning, guys. Good morning, David. Most of my questions have been answered at this point. But just one question on the pipeline. You mentioned the kind of resiliency of the pipeline, but curious if that has started to slow at all through the quarter, Particularly in the non LiTECH business and then, I guess I'll ask the follow-up on the LiTECH business separately.

Speaker 4

Yes. Certainly,

Speaker 1

the LiTec pipeline remains vibrant, given the demand for affordable housing. So that's really been fairly consistent. The demand for the core commercial business actually slowed a couple of quarters ago As rates started to decline because any of the investor developer kind of stuff kind of got stressed by that, we've actually had, I think people kind of clients starting to get their head around dealing with interest rates in the 8% range and There's certainly a slowdown in developer business, but some of our core commercial manufacturing owner occupied business That appears to actually be bouncing back just a little bit. So not at that 8% to 10% pace that maybe we've grown historically, but modest growth in our core commercial. And so it's kind of a mixed bag right now depending on which sector you're in, but we think we can continue to grow assets at the pace we outlined in our comments.

Speaker 5

Okay, great. And then I guess, so the follow-up on the LiTec business is, Have you found there's any kind of cyclicality to credit within LiTec? You've talked about The credit history of that asset class being very strong, but just curious if the loans being added at this point in the cycle have Any different kind of credit attached to them in your opinion?

Speaker 1

No. What I'd say is almost none. These are continued, I believe, to be the highest quality loan assets we have on our books. We have no past dues. We have none of the LiTAC loans that are criticized or classified.

Speaker 1

We've got none of them with issues of stabilization because the demand for affordable housing is so great. And so over the last 30 years, this has been Very steady performer from an asset quality standpoint. And just a reminder, we are low loan to values with lots of capital into these deals, Depending on whether taxable like tax exempt, there's 2 different structures, but there's a lot of cash in these and a lot of strong underpinnings that have made these very stable

Speaker 5

Okay. That's all I had. Thanks for answering my questions.

Speaker 1

Thank

Speaker 4

you.

Operator

And our next question today comes from Jeff Lewis with D. A. Davidson. Please go ahead.

Speaker 7

Hi, good morning. This is Anish for Jeff. Just a question, apologies if I missed it, but What's the appetite for Lydtech securitizations in 2024? And then I guess just indirectly also asking for Total loan growth expectation in 2024.

Speaker 1

So, yes, let me talk about the a little bit more broadly. Again, we've historically kind of grown our loan portfolio with a 10% clip over a long period of time. If you cut it down to a simple methodology, what we're probably going to do is manage our loan Well, up to maybe more of a 5% growth using the securitization. We think that will provide better operating results over time now that we've got the book built. And so we will plan to do several securitizations during next year.

Speaker 1

We'll probably give more guidance on that after our Q4 call. We're going to learn a lot as we get these first two trunks of securitization done here in the next few weeks. And so that will give us some clarity on our And allow us to give you a better strategy as we go forward. So loan growth we expect to still be meaningful next year, but we're going to take the top off at using the securitization.

Speaker 7

Got it. That's great color. Thank you. And then Just kind of hopping over to the capital side here. Capital seems healthier than peers if you look at regulatory or TCE given the lack of AOCI headwinds.

Speaker 7

Just wanted to get a sense of where the buyback sits on your capital priority?

Speaker 1

Yes. In the near term, given the uncertainty that's going on in the world and the economic climate, we're going to be very cautious on Buyback for the next quarter or 2. Until we have some clarity on interest rates and probably on the economic environment, we're going to probably hold on Capital and focus on building TCE. We certainly have plenty of regulatory capital and don't feel any pressure there. But it just seems like it's prudent right now and to hold on to capital.

Speaker 1

And then ultimately, once we Again, our TCE probably to the top quartile of the peer group, and we're not that far from it. Sometime during next year, we'd likely look at being more aggressive on buybacks.

Speaker 7

Got it. That's all I had. Thanks for taking the questions and congrats on the quarter.

Speaker 2

Thank you.

Operator

Thank you. And ladies and gentlemen, this concludes your question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Speaker 1

I would like to thank all of you for joining our call today. We appreciate your interest in our company. We look forward to talking to you again soon.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Key Takeaways

  • 3Q financial highlights: net interest income rose 3.9% from 2Q to $55.3 M, with adjusted EPS of $1.51 and an adjusted ROAE of 12.12%.
  • Strong loan growth: total loans grew 14.2% on an annualized basis, driven by both traditional lending and low-income housing tax credit (LiTEC) financings.
  • Core deposit stability: excluding short-term brokered deposits, core deposits were essentially flat, while uninsured/unsecured deposits remained low at 20.1% and are fully covered by ample liquidity sources.
  • Sound asset quality: nonperforming assets stood at just 41 bps of total assets and reserve coverage was 1.9% of loans, reflecting a conservative credit approach.
  • Q4 LiTEC securitizations: the company plans to securitize $130 M of tax-exempt and $135 M of taxable LiTEC loans to bolster liquidity and capital, targeting a breakeven financial outcome.
AI Generated. May Contain Errors.
Earnings Conference Call
QCR Q3 2023
00:00 / 00:00